Lobbying Guidelines for Section 501(c)(6) Organizations
An organization that is exempt from taxation under Section 501(c)(6) of the Internal Revenue Code (the “Code”) is permitted to engage in virtually unrestricted lobbying activities, provided that such activities are germane to the common interests of its members. The only restrictions that exist are less substantive in nature and are concerned primarily with whether an exempt entity's activities generally improve the business conditions of one more lines of business, where actually achieving an improvement is immaterial.
Accordingly, an exempt organization is precluded from providing individual members with benefits that constitute private inurements. Additionally, an exempt entity is constrained by notice requirements and the deductibility (or nondeductibility) of certain funds that it expends in furtherance of its lobbying efforts. Therefore, the activities of 501(c)(6) tax-exempt entities are, for the most part, regulated by tax laws and incentives; beyond the avoidance of conflicts of interest and aspirational goals such as increased disclosure, such entities face few ethically based restrictions.
Sections 501(a) and (c)(6) of the the Code exempt from taxation: “business leagues, chambers of commerce, real-estate boards," and boards of trade (each a “501(c)(6) organization” or a “501(c)(6) entity”). A business league is defined as “an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily carried on for profit. It is an organization of the same general class as a chamber of commerce or board of trade. Thus, its activities should be directed to the improvement of business conditions of one or more lines of business as distinguished from the performance of particular services for individual persons.”
The following will evaluate the guidelines and restrictions that exist for 501(c)(6) entities, beginning with a general discussion based on the statutory restrictions provided by the Code and concluding with an evaluation of the ethical guidelines that the boards of directors of 501(c)(6) organizations should consider.
Statutory Concerns for 501(c)(6) Organizations
Beyond the statutory requirements imposed by Section 501(c)(6) and Reg. Section 1.501(c)(6)-1, there are no restrictions placed on the particular activities conducted by entities exempt from taxation under those sections of the Code. Revenue Ruling 61-177 states that “There is no requirement, by statute or regulations, that a business league, chamber of commerce, etc., in order to be considered exempt as such, must refrain from carrying on propaganda or influencing legislation.”
Specifically, Revenue Ruling 61-177 answers the question of whether an organization that otherwise meets the requirements of Section 501(c)(6) may qualify for tax exemption if “its sole or principal activity is the advocacy of legislation beneficial to such common business interest.” Because the objectives sought by the entity in question in the Revenue Ruling could only be achieved through legislation, the Internal Revenue Service (“IRS”) found that the entity's legislative activities in advocating its common interests were “germane” to the achievement of its objectives and were within the scope of the Section 501(c)(6) exemption.
Therefore, in order to maintain its exempt status, a 501(c)(6) organization need only satisfy the following criteria: (1) its purpose is the promotion of the common business interest of its members, (2) its principal activity is not the performance of particular services for individual persons, (3) its purpose is not to engage in a regular business of a kind ordinarily carried on for profit, (4) its activities are directed to the improvement of business conditions of one or more lines of business, and (5) its net earnings do not inure to the benefit of any member.
Activities Must Improve Business Conditions
A 501(c)(6) organization must act in ways that improve the business conditions of one or more lines of business, where a “line of business” is defined as a “trade or occupation, entry into which is not restricted by a patent, trademark, or other means that allow private parties to restrict the right to engage in the business.” Given that the activities of a 501(c)(6) entity must have a goal of benefiting at least one line of business and the members of the 501(c)(6) entity as a group, it follows that the organization cannot take part in activities that are primarily related to particular services for individual persons.
Examples of permissible activities are presenting information, group opinions, and trade statistics to government agencies and bureaus as well as lobbying that is directed towards promoting legislation that is related to the common interests of its members. However, it is immaterial whether a 501(c)(6) entity's activities actually improve business conditions. Rather, the standard for determining whether an organization's activities satisfy the requirements for its tax exempt status is whether "reasonably prudent businessmen believe they will improve business conditions.”
To aid a 501(c)(6) entity in its compliance with statutorily mandated procedures, the IRS has provided the following guidelines regarding legislative activities:
Interview the organization's officers and review the minutes, newsletters, web sites, and correspondence to identify any legislative activities.
Determine whether any lobbying is related to the organization's exempt purpose.
Determine whether any officials of the organization are registered lobbyists.
Review any contracts with outside lobbyists to determine the extent and the nature of such lobbying.
Determine whether the business league is subject to the reporting requirements of IRC section 6033(e).
Review dues statements of business leagues subject to such requirements to determine whether amounts used for lobbying were properly reported.
Inspect Form 990-T filed by business leagues which elected not to or failed to provide such notification to verify the proxy tax under IRC section 6033(e)(2).
Prohibition Against Private Inurement
The net earnings of a Section 501(c)(6) entity may not inure "to the benefit of any private shareholder or individual." The determination of whether such an inurement has occurred is fact specific and is determined by courts on a case-by-case basis. Consequently, an exact definition of what constitutes an inurement does not exist.
Nevertheless, certain factors may be helpful in providing guidance to 501(c)(6) entities in their efforts to avoid impermissible inurements. For instance, an inurement results from "an expenditure of organizational funds resulting in a benefit which is beyond the scope of the benefits which logically flow from the organization's performance of its exempt functions." Thus, disbursements of cash to members which essentially equate to a rebate of dues paid are not considered inurements if such distributions are paid in the same proportion as the dues are paid.
The inurement prohibition does not prevent 501(c)(6) organizations from providing their members with informative material, such as newsletters. However, members of an exempt entity are precluded from receiving benefits at special rates that are not made available to other members.
As a general rule, the management of a 501(c)(6) entity may want to keep the following guidelines in mind:
Review the organizational documents, membership solicitation materials, minutes, and contracts with employers to identify the types of benefits provided to officers and members.
Review the organization's employment contracts, Forms W-2 and other employment records to determine the number and duties of the organization's employees and the reasonableness of salaries and benefits.
Review the disbursement journal to identify any payments to members and determine the reason for any such payments.
Because the evaluation of alleged inurements is specific to each case, the above IRS guidelines may assist an exempt entity in recognizing possible sources of concern with respect to potential inurement problems.
Sections 6033(e) and 527
Expenditures for 501(c)(6) entities that relate to lobbying activities may be subject to the requirements of Section 6033(e). Section 6033(e) of the Code imposes a notice requirement and proxy tax on the lobbying expenditures of certain business leagues.
Under Section 6033(e)(1)(A)(i), a 501(c)(6) entity must include on its tax return the total expenditures and dues paid to the entity that fall within Section 162(e)(1), which denies the deductibility of certain lobbying and political expenditures. In addition, Section 6033(e)(1)(A)(ii) requires a 501(c)(6) entity to provide to each person who pays dues to the exempt entity notice of a reasonable estimate of the portion of such dues which are not deductible under Section 162(e)(1).
A 501(c)(6) entity may also be subject to taxation under Section 527(f) if its advocacy of public policy issues includes the discussion of the positions of public officials who are also candidates for public office. Section 527 exempts "political organizations that collect and expend monies for exempt function purposes" from Federal income tax, except with respect to their investment income.
A "political organization" is defined as a "party, committee, association, fund or other organization (whether or not incorporated), organized and operated primarily for the purpose of accepting contributions or making expenditures, or both, for an exempt function." Further, an "exempt function" is defined as “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.”
However, a 501(c)(6) organization may be imposed a tax under Section 527(f) if its political expenditures are from its general treasury rather than from a separate segregated fund.
Where an "advocacy communication" explicitly calls for the election or defeat of an individual with respect to his or her bid for public office, the expenditure for such communication is inarguably for an exempt function. However, where an advocacy communication does not explicitly advocate a victory or defeat of an individual to public office, the determination of whether an expenditure directed to that end is for an exempt function requires an evaluation of surrounding facts and circumstances. Revenue Ruling 2004-6 sets forth the following guidelines for determining whether an advocacy communication is for an exempt function under Section 527(e)(2):
The communication identifies a candidate for public office;
The timing of the communication coincides with an electoral campaign;
The communication targets voters in a particular election;
The communication identifies that candidate's position on the public policy issue that is the subject of the communication;
The position of the candidate on the public policy issue has been raised as distinguishing the candidate from others in the campaign, either in the communication itself or in other public communications; and
The communication is not part of an ongoing series of substantially similar advocacy communications by the organization on the same issue.
Additionally, the IRS in its Internal Revenue Manual has provided the following guidelines for a 501(c)(6) entity's examination of its political activities:
Interview the officers and review the minutes, newsletters, web sites, and correspondence to identify possible political activities conducted by the organization or the existence of a separate political fund.
Analyze the following accounts for possible political expenditures:
Legal fees,
Bonuses,
Printing,
Advertising, and
Entertainment
Analyze bank statements, disbursement journals, etc., to identify whether the organization maintained a separate segregated fund for the purpose of making political expenditures.
Ethical Considerations
Little guidance appears to exist regarding when it is ethically appropriate for a 501(c)(6) entity to adopt and then publicly lobby for a particular legislative position. Such a dearth of information may be due to the absence of restrictions placed on the substantive nature of lobbying that is legally permissible for 501(c)(6) entities. Indeed, the law seems to constrain the activities of exempt organizations through notification requirements and the provision of tax exemptions for certain lobbying expenditures. Moreover, given that a business league must act to promote its members' common interests in order to qualify for exempt status under § 501(c)(6), it might be assumed that a 501(c)(6) entity is unlikely to conduct activities that are contrary to its members' wellbeing, thus minimizing the need for ethically based restrictions. However, some guidance is available in the two articles discussed below.
Conclusion
Once an organization has been given tax exempt status under Section 501(c)(6), it should focus on two general guidelines in order to maintain its standing with the IRS: it should (1) ensure that its activities improve the business conditions of one or more lines of business and (2) prohibit any benefits to its members that may constitute a private inurement. From an income tax perspective, a 501(c)(6) entity should also be mindful of notice requirements and deductibility issues with respect to its lobbying activities and the funds it expends in furtherance of those activities. Beyond statutory and tax-based requirements, the board of directors of a 501(c)(6) entity must consider its fiduciary obligations to the trade associations they serve, paying particular attention to potential conflicts of interest among directors and increased disclosure directed towards association members.