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Private Foundations and Policymaking: Working with Public Charity Grantees That Lobby
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This material is excerpted from Private Foundations and Policymaking: Latitude Under Federal Tax Law (May 2002), by Thomas A. Troyer and Douglas Varley of Caplin & Drysdale, Chartered. The original research paper was commissioned by The Center on Philanthropy and Public Policy (CPPP) at the University of Southern California for its 2002 Forum, "Leveraging Philanthropic Assets For Public Problem Solving," under its Foundations and Public Policymaking project, funded by The David and Lucile Packard Foundation. The materials are made available here by kind permission of the authors and publisher. |
The law allows public charities to engage in a significant amount of lobbying.* Consequently, these organizations can generally be more effective advocates for, or against, legislation than the foundations that fund them. Hence, while there is much foundations can do themselves, for most foundations, the principal means of participating in the legislative process is supporting public charities working to achieve changes the foundation favors.
The regulations provide two safe harbors for foundation grants to public charities that prevent attribution of the grantee's lobbying to the foundation even if the grantee, in fact, uses the foundation's funds to lobby. These rules have enabled foundations to fund advocacy campaigns that include lobbying on topics as diverse as tobacco taxes, criminal sentencing, funding for after school programs, and campaign finance reform.
The first safe harbor provides that a private foundation can make a general purpose grant to a public charity engaged in lobbying activities without risking any tax penalty. As long as the grant is not "earmarked" for lobbying, it will not be treated as a lobbying expenditure by the foundation even if the grantee uses some or all of the funds to pay for lobbying expenses.** For these purposes, a foundation grant is "earmarked" if there is an agreement between the foundation and the grantee that the funds will be used to support specific activities. The mere fact that the foundation knows the organization will be engaged in lobbying during the grant period does not constitute earmarking and will not cause a general support grant to be a lobbying expenditure for the grantor. Hence, this protective rule allows a foundation to identify public charities that advocate legislative positions it wants to see adopted and to provide those organizations general operating support thereby increasing their ability to promote the foundation's policy agenda.
In practice, foundations make relatively few general support grants, preferring instead to fund specific projects. The second safe harbor in the foundation rules addresses this kind of grant. The federal regulations state explicitly that a private foundation can make a grant to a public charity for a specific project that will include lobbying provided the amount of the grant is no more than the amount budgeted by the grantee for non-lobbying expenditures.*** Absent earmarking, such a grant will not be a prohibited lobbying expenditure for the grantor even if the grantee spends more on lobbying than projected and uses the foundation's grant to pay these costs. Thus, the rule for project grants creates an opportunity for foundations to target their grants on activities that directly advance their legislative objectives.
- Example: A public charity submits a proposal seeking support for a project to protect an environmentally significant watershed. The project will include three activities: (1) researching and compiling information documenting the significance of the watershed and the risks to it; (2) running nonlobbying media advertisements lacking a call to action that will educate the public about this issue; and (3) meeting with legislators and staff to urge passage of legislation restricting development in the area. The budget for the project indicates that the grantee expects to spend $80,000 on activities that will not be lobbying and $20,000 on activities that will be lobbying. The foundation can safely make a grant for the project of up to $80,000.****
In sum, notwithstanding the ban on foundation lobbying, the law leaves foundations able to conduct or fund an expansive set of advocacy activities. These rules are technical and complex, but once a foundation understands them, it can safely include support for legislative advocacy among the strategies it uses to achieve its charitable objectives. Given the centrality of government action in protecting and promoting the public good in our system, it is not surprising that foundations find this strategy to be among the most potent means of advancing their broader purposes.
* Under section 501(h) of the Internal Revenue Code, public charities may spend up to 20 percent of the first $500,000 of their program budget on lobbying. For organizations with larger budgets, the permitted lobbying percentage decreases as the size of the budget increases, reaching a maximum lobbying expenditure limit of $1 million for organizations with charitable budgets of $17 million or more. Lower limits apply to grassroots efforts to mobilize the public.
** See Treas. Reg. § 53.4945-2(a)(6)(i). It is worth noting that the foundation will be protected even if the grantee loses its tax-exempt status because of excessive lobbying. [See: Treas. Reg. § 53.4945-2(a)(7).]
*** See Treas. Reg. § 53.4945-2(a)(6)(ii).
**** Again, loss of the grantee's tax-exempt status will not alter the legal consequences of the grant for the foundation.