Politics & Lobbying - Nonprofits by NonProfitCPAs

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Information on politics and lobbying and how Schedule C filing requirements are impact - Tate Tryon CPAs.

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									Politics and Lobbying: A
Deep Look at Schedule C
presented by
Deborah G. Kosnett, CPA
Tate & Tryon, CPAs, Washington, DC
Speaker Biography
Deborah G. Kosnett, CPA, is a Tax Principal with Tate &
Tryon, CPAs and Consultants, in Washington, DC, a firm
specializing solely in not-for-profit organizations. She has 25
years' experience as a tax advisor to not-for-profit
organizations throughout the country. Prior to joining Tate &
Tryon in 1999, Ms. Kosnett was a senior tax manager with
both KPMG and Ernst & Young in Washington, DC, where
she worked with numerous exempt organizations, as well as
with not-for-profit hospitals and multi-entity health systems.

Ms. Kosnett is a frequent contributor to American Society of Association Executives
(ASAE) publications, including “2011 Form 990: Reporting Requirements for
AMCs,” and “Need-to-Knows in the New 990.” She is also a regular presenter at
conferences held by AICPA, ASAE, the Greater Washington Society of CPAs, and
the Finance and Administration Roundtable, and is a co-author of ASAE's "Guide to
the Newest Form 990.” Ms. Kosnett currently serves on the AICPA's Exempt
Organizations Technical Resource Panel, where she assists with numerous
initiatives, including the TRP's Form 990 Task Force.




       American Institute of CPAs
Politics and Lobbying . . .
             Not the same thing!
             Political activity – influencing, or attempting to influence, the
             selection, nomination, election, or appointment of any individual to
             any Federal, state, or local public office

             Lobbying – generally, any attempt to influence legislation through
             communication with any member or employee of a legislative
             body, or with any government official or employee who may
             participate in the formulation of legislation


                      Different types of organizations =
                           different lobbying rules
  American Institute of CPAs
Who Files Schedule C?
                                        §501(c)(4),    Other
                         §501(c)(3)       (5), (6)    §501(c)s   §527’s

Lobbying -
charities                         Yes      No           No        No

Lobbying -
other                             No       Yes        Maybe       No

Political
Activity                      NO!          Yes          Yes      Yes*


     American Institute of CPAs
Schedule C Trigger Questions




   American Institute of CPAs
       Schedule C
Part I – Political Activity




American Institute of CPAs
Part I – Political Activity Reporting




   American Institute of CPAs
Part I-A: (almost) Everyone


        Report both direct and indirect
         political campaign activities
                                                         Line 3: Report
 Line 1: requires a
                                 Line 2: Correctly-   volunteer hours for
  Part IV narrative
                                   handled PAC         the organization’s
 description – even
                                 contributions are        own political
  if only activity is
                                NOT reported here;       activities – not
      through a
                                 everything else is   those of connected
   connected PAC
                                                               PAC

   American Institute of CPAs
Part I-B: §501(c)(3)’s ONLY


                                      The term “political
                                   expenditure” means any
 Part I-B asks                     amount paid or incurred        Part I-B is
 about excise                       by a section 501(c)(3)
                                      organization in any
                                                                 never filled
taxes imposed                         participation in, or     out … unless a
                                  intervention in (including
  by §4955 in                          the publication or      §501(c)(3) did
  connection                             distribution of        something it
                                  statements), any political
 with political                     campaign on behalf of         shouldn’t
 expenditures                      (or in opposition to) any
                                     candidate for public
                                                                    have!
                                   office. – IRC §4955(d)(1)



     American Institute of CPAs
Section 4955 Excise Taxes

 Tax imposed on political expenditures
       of §501(c)(3) organizations
   Organization
 excise tax = 10% Manager excise tax =
 of the amount of 2.5% of the amount of the Additional excise tax
    expenditure political expenditure       on the organization
                             • Imposed upon on any manager • 100% of uncorrected
                               who knowingly agreed to            political expenditure
                               expenditure (unless not willful,
                               and due to reasonable cause)     • 50% of uncorrected
                                                                  expenditure upon any
                             • Joint and several liability!       organization manager
                                                                  refusing to make
                                                                  correction


    American Institute of CPAs
What is a “Correction?”

Recovering the political expenditure
     (to the extent possible)


               Establishing safeguards to prevent
                  future political expenditures


                               Line 4 requires a description of the steps
                                   taken to correct the activity that
                                        triggered the § 4955 tax

  American Institute of CPAs
IRM – Termination Assessments

7.25.3.18.4 (02-23-1999)
Termination Assessments and Injunctions
The Service is authorized to make an immediate determination and assessment of income tax, or of
the tax imposed by IRC 4955, for the current or preceding year of an IRC 501(c)(3) organization, if
the Service finds that the organization has made political expenditures and that such expenditures
constitute a flagrant violation of the prohibition against making political expenditures. For this
purpose, the organization’s current taxable year is treated as if it terminates on the date taxability
is determined. IRC 6852. Any taxes assessed under IRC 6852 against the organization or its
managers become due and payable immediately.


The Service may seek an injunction to bar political expenditures by an IRC 501(c)(3) organization
after it has notified the organization of its intention to seek an injunction if the organization does
not immediately cease making political expenditures and after the Commissioner personally has
determined that the organization has flagrantly participated in a political campaign and that an
injunction is appropriate to prevent further abuse. The Service also may seek such other injunctive
relief as may be appropriate to ensure that the organization’s funds are preserved for IRC 501(c)(3)
purposes. IRC 7409.



       American Institute of CPAs
Part I-C: Everyone BUT §501(c)(3)




  American Institute of CPAs
Most Non-§501(c)(3)s …
May make political expenditures, as long as they do so within the confines
of Federal and state laws that otherwise govern political activity …

 • §501(c)(1) federal instrumentalities cannot make any election
   expenditures (2 USC §441(b))
 • §501(c)(2) and (25) title holding organizations likely cannot make
   political expenditures (or lobby, either)

                                   … as long as it is not their primary activity!

  Federal Election Campaign Act imposes restrictions on some corporate
                         direct political activity

              Some states impose restrictions on political activity


     American Institute of CPAs
Beware: Definitions are Important!
For Schedule C purposes, § 527’s definition of “exempt
function expenditure” controls:
 §527(e)(2) Exempt Function
 The term “exempt function” means the function of influencing or attempting to
 influence the selection, nomination, election, or appointment of any individual to
 any Federal, State, or local public office or office in a political organization, or the
 election of Presidential or Vice-Presidential electors, whether or not such
 individual or electors are selected, nominated, elected, or appointed

 §271(b)(3) Expenditures
 … the term “expenditures" includes a payment, distribution, loan, advance,
 deposit, or gift, of money, or anything of value, and includes a contract, promise,
 or agreement to make an expenditure, whether or not legally enforceable.




      American Institute of CPAs
The Federal Election Campaign Act

              Prior to Citizens United, FECA prohibited corporations (and labor
              groups) from using general treasury funds to make contributions or
              expenditures in connection with federal elections


                    Under FECA, a political contribution is anything of value (money,
                    goods and services, in-kind contributions), loans/guarantees,
                    advances) given to a PAC’s hard money account, to a candidate
                    committee, or to a campaign committee


              The Citizens United decision has enabled corporations to make so-
              called “independent expenditures” in connection with Federal election
              campaigns




   American Institute of CPAs
Ripped from the Headlines . . .




   American Institute of CPAs
Ripped from the Headlines . . .




   American Institute of CPAs
              Schedule C
           Part II – Lobbying
              (Charities)




American Institute of CPAs
Different Orgs, Different Rules

                                       §501(c)(3)           §501(c)(4), (5), (6)

How much                         Limited – “no             Unlimited (as long as
                                 substantial part”         related to exempt
lobbying                                                   purpose)

Taxation/                        -   Excise taxes on       35% “proxy” tax
                                     excess                OR
Revocation                       -   Loss of exemption     Nondeductible dues
                                     for excess lobbying   pass-through
Exceptions to                    Some narrow               Some narrow (different)
                                 exceptions                exceptions
lobbying

    American Institute of CPAs
 §501(c)(3) – What is Lobbying?
An attempt to influence (propose, support, or oppose) legislation, by
propaganda or otherwise
 • Congressional, state, or local legislative action
   • Does not include executive branch action or agency regs
 • Public referenda, initiative or constitutional amendment
 • Formal and informal contacts with legislative members, staff, even executive branch (if
   regarding legislation)

Both direct and grassroots lobbying


Exceptions –

 • Written requests to present testimony on pending legislation
 • Nonpartisan, published research (that does not encourage enactment or defeat)
 • Indirect influence via pursuit of exempt purpose

         American Institute of CPAs
How is Lobbying Activity Measured?
                                  “No Substantial Part” test
 §501h “Expenditure” test                (default)
• Schedule C, Part II-A           • Schedule C, Part II-B
• Looks only at dollars spent     • Looks at expenditures,
• Requires a one-time election      volunteer activities
  (revocable)                     • Vague and subjective!
• Provides clearer lobbying
  definitions
• Measures both direct and
  grassroots lobbying
• Churches, integrated
  auxiliaries (and related)
  CANNOT make the election


     American Institute of CPAs
The §501h Election

                   Spending limits based
                      on total “exempt           Lobbying/Grassroots
                          purpose”
                        expenditures             Nontaxable Amounts
                    (lobbying + “other”)             20% of first $500,000
                                                     15% of next $500,000
                                                     10% of next $500,000
                  Overall ceiling is 150%         5% of remainder, up to …
                  of a 4-year average             Direct spending limit of $1
                  • 25% tax on excess for any               million
                    one year (Form 4720)         Grassroots spending limit of
                  • Exemption is revoked if
                    4-year ceiling is exceeded
                                                           $250,000




  American Institute of CPAs
§501h – More Precise §4911 Definitions
Direct – attempt to affect legislation through direct contact with legislative
bodies, or others involved in formulating legislation

Grassroots – attempt to affect legislation by affecting public opinion

 • Contacts with members are considered direct lobbying

Four significant exceptions –

 • Dispensing the results of nonpartisan analysis, study, research
 • Providing technical advice or assistance per legislative body’s written
   request
 • “Self-defense” exception (organization’s existence, powers, duties,
   exempt status, deductibility of contributions)
 • Communications with members that inform but do not directly
   encourage

      American Institute of CPAs
Part II-A – Lobbying Under §501h




  American Institute of CPAs
§501h with Affiliate –Excess $$ in 2011




   American Institute of CPAs
§501h – Expenditure Test Failure!




  American Institute of CPAs
What Happens When a §501(c)(3) Fails?

It may NOT become a § 501(c)(4) (even though it might
otherwise qualify)

Becomes a taxable organization (usually a corporation)


GCM 39813: tax treatment of –

• Gross receipts of trade/business activities - taxable
• Income from investment and other formerly “excluded” activities - taxable
• “Good faith” contributions – generally nontaxable under §102
  • Donors may be subject to gift tax


     American Institute of CPAs
Part II-B – No §501h Election




Unlike Part II-A, II-B directly asks if lobbying causes the
organization to fall out of § 501(c)(3)!

     American Institute of CPAs
§4912 – Disqualifying Lobbying Expenditures

Paid by disqualified §501(c)(3)’s
 • Does not apply to those with a 501h election
 • Nor to private foundations
 • Nor to organizations unable to make a 501h election
5% tax on disqualifying expenditures –
 • Paid by organization itself, and
 • Paid by any organization manager approving the
   expenditures knowing they were likely to disqualify the
   organization
   • Joint and several liability!

    American Institute of CPAs
             Schedule C
          Part III – Lobbying
                 (Other)




American Institute of CPAs
Non- §501(c)(3) Lobbying

Not restricted as long as related to exempt purpose

§162(e) denies a deduction for most lobbying and political expenditures

Nondeductible expenditures relate to –
 • Influencing legislation
 • Participation in or intervention in any political campaign
 • Attempting to influence the general public w/respect to elections, legislative matters,
   referenda
 • Direct communications with a “covered executive branch official”

Denial applies to dues paid to lobbying organizations

Organizations may elect to pay a 35% “proxy” tax instead



       American Institute of CPAs
Exceptions

Local legislation

De minimis exception – in-house (only!)
expenditures of $2,000 or less

Political expenditures already taxed under §527
(Form 1120-POL)

Organizations where “substantially all” (90% or
more) dues were not deductible by members

    American Institute of CPAs
Lobbying Expenditure Calculation

    May use “any
reasonable method”               • You may even switch methods from
to calculate lobbying              year to year
    expenditures

 IRS offers specific
                                 • Ratio method, gross-up method,
 methods: 2 easy, 1
                                   §263A method
        hard


Be sure to include 3rd • Outside lobbyists
  party costs, PAC     • Dues paid to other lobbying organizations
  admin expenses       • Travel/entertainment costs

    American Institute of CPAs
Notification Requirements
Notify members of nondeductible dues (invoice or
acknowledgement)
Calculation is always a rolling estimate – “true up” annually, revise
percentage

Overages may be rolled forward (“waiver”)


             May an “under-age” be rolled forward?
    Discussion in IRS EO CPE article for FY 2003 says “yes” . . .
“… the legislative history clearly indicates that organizations that overstate the
portion of dues that are not deductible may be able to take this excess into
account. Until such time as guidance is issued, a reasonable method would be
to treat an overstatement similarly to an understatement and take the excess
amount into account in the following year by subtracting it from the estimate of
lobbying and political campaign expenses for that year.”


      American Institute of CPAs
   Simple, Straightforward, All-Purpose
                Notification

 "Dues payments, contributions or gifts to XYZ Association are
not tax deductible as charitable contributions for federal income
tax purposes. However, they may be deductible as ordinary and
 necessary business expenses subject to restrictions imposed
as a result of XYZ's lobbying activities as defined by the Budget
        Reconciliation Act of 1993. XYZ estimates that the
 nondeductible portion of your 20XX dues -- the portion that is
                allocable to lobbying -- is ___%.“




     American Institute of CPAs
Part III – §501(c)(4), (5) and (6) Lobbying




   American Institute of CPAs
Real-Life Schedule C - Political

                               • § 501(c)(4)
                               • Corporation
   The                         • Supported in 2010 by $6.9
  “ABC                           million in contributions, plus
 Action                          minimal investment income
                               • 2010 expenditures: $7 million
League”                        • Can realistically be called an
                                 “independent expenditure PAC”


  American Institute of CPAs
American Institute of CPAs
American Institute of CPAs
American Institute of CPAs
Real-Life Schedule C – 501h Election


                                • § 501(c)(3)
                                • Corporation
                                • Supported in 2009 by $29
    The “XYZ                      million in government grants
  Foundation”                     and contributions, $285K in
                                  program services, $3.3
                                  million in other
                                • 2009 expenditures: $30
                                  million


   American Institute of CPAs
American Institute of CPAs
American Institute of CPAs
American Institute of CPAs
Real-Life Schedule C – §162(e) Lobbying


              • § 501(c)(6)
              • Corporation
     The      • Supported in 2010 by $5.8
 “Amalgamated   million in contributions, $28.8
    Widget      million in services, $400K in
   Makers”      other
              • 2010 expenditures: $34
                million


   American Institute of CPAs
American Institute of CPAs
American Institute of CPAs
American Institute of CPAs
Resources and Further Reading
Alliance for Justice
Center for Lobbying in the Public Interest
IRS – Tax Information for Political Organizations
IRS – TEOs and Political Campaign Intervention
IRS – Lobbying, Charities
IRS – Lobbying, Business Leagues
IRS StayExempt Course on Politics and Charities
FEC – Federal Campaign Finance Law & Regulations
IRC EO CPE 2004 – Political Campaign and Lobbying
Activities of IRC 501(c)(4), (c)(5) and (c)(6)
Organizations

    American Institute of CPAs
Questions?




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