In late 2009, the IRS issued a private letter ruling (a “PLR”) that offers guidance for grantmaking public charities that have made a lobbying election under Section 501(h) of the Internal Revenue Code of 1986, as amended (the “Code”). Although PLRs are only binding precedent for the party involved, they can serve as valuable tools to discern how the IRS may rule in similar situations in the future.
Pursuant to Code section 501(h), public charities may “elect” to have their lobbying activities governed by an expenditure test. The corresponding provisions of the United States Treasury Regulations (the “Regulations”) indicate that a public charity electing to be governed by Code section 501(h) may make lobbying expenditures within specified dollar limits, and that it will not owe tax nor lose its tax-exempt status if its lobbying expenditures are within the specified dollar limits. In PLR 200943042, a Code section 501(c)(3) public charity that had made a Code section 501(h) election (the “Charity”) asked the IRS for several determinations regarding grants to other public charities that conduct lobbying activities.
While the Regulations governing private foundations provide that general support grants by private foundations to public charities are not treated as taxable expenditures for lobbying if the grant is not earmarked for lobbying, there is no comparable provision that addresses a grant from one public charity to another public charity. In this regard, in PLR 200943042, the IRS indicated that “the standard for public charities should be no more stringent than that which applies to private foundations, as such an approach is consistent with the extensive legislative history and Code provisions that indicate a Congressional intent to encourage grantmaking and advocacy by public charities while penalizing private foundations that earmark grants to support lobbying.” Accordingly, the IRS determined that the Charity may treat general support grants to another public charity as non-lobbying expenditures as long as the grant is not earmarked for lobbying as defined in Code section 4911(d) and the corresponding Regulations. Moreover, the IRS also determined that a grant restricted to a specific project of a public charity is not solely, by virtue of that restriction, earmarked for lobbying.
The IRS further examined the circumstances by which grants for specific projects will be treated as lobbying expenditures and non-lobbying expenditures. The IRS determined that the Charity could treat a project grant to a public charity as not earmarked for lobbying if the grant amount, combined with its other grants for that project over the year, did not exceed the non-lobbying portion of the budget of the funded project and the Charity did not doubt, or have reason to doubt, the budget information provided by the public charity. However, if the Charity made a project grant that exceeded the non-lobbying portion of the project budget, then the Charity must treat as a lobbying expenditure the amount by which the grant exceeded the non-lobbying amount of the budget.
The IRS declined to issue a ruling with respect to whether the Charity could treat a grant to another public charity as a non-lobbying expenditure if the Charity expresses a desire, request, or suggestion (in the grant letter or in prior or subsequent communications) that the funds be used to support a specific project, even if there is no other oral or written agreement or understanding with regard to the use of the funds. The IRS indicated that such a determination would depend upon the specific facts and circumstances.