Understanding when nonprofits can, and can't, engage in political advocacy

Local philanthropists were surprised recently when many of the local environmental, health care, and community nonprofits to which they donate were discovered to have lobbied the SJ City Council in support of Labor's widely criticized redistricting maps, which have been credibly accused of suppressing Asian-American votes. The Labor plan failed, but the question lingered as to the appropriateness of those nonprofits' legislative solicitations. Opp Now co-founder Christopher Escher talked to nonprofit attorney Scott Hartley of Hartley Law (full disclosure: he’s also Opp Now’s lawyer) to get some clarity about the parameters that apply to nonprofits when it comes to political activity.

Christopher Escher: I can remember that when we started Opp Now—which is an educational 501c3—you were super clear with us: you said, “you can have an educational perspective on political issues, but it's not your job to endorse a particular candidate or issue directly.” We understood that as “Don’t say ‘vote for Joe’.”  Did we get that right?

Scott Hartley: Yes, you got that right.  Opp Now is not a lobbying group. That’s not your purpose.  Nonprofits can lobby as long as it's an insubstantial part of what they do. Now, what's “insubstantial”? That is an “eyeball” test, according to the IRS. Broadly speaking, a regulatory agency looks at the totality of activities. The test I’m describing gives the IRS fairly broad discretion. Courts have held that devoting as little as 5% of your time and activities to be “substantial.” So, it is very possible, maybe even easy, to flunk this substantial/insubstantial test. If what you are doing is found to be substantial, you can lose tax-exempt status. 

But let me be clear: Nonprofits can educate and even advocate around legislation but need to fall short of saying, "Vote for this or don't vote for this."  That is the direction I gave you guys at Opp Now and I give the same direction to my other nonprofit clients. I take a conservative approach in these matters and that informs my advice.  There is lots of room to make arguments around the edges of this area, but I prefer my clients not get in the argument in the first place.

CE: You also told us to stick to our knitting: We received nonprofit status based on our commitment to providing free-market perspectives on local politics, not to create a nonprofit Cat Cafe—much as we would like to do that! In the case of local nonprofits lobbying around redistricting maps, it struck many people that environmental charities were way off brief when they got into the business of analyzing census results.

SH: Another way to lose your tax-exempt status is to be pursuing activities that are outside of what you said you were going to do when you sought your exempt status. When you file as a nonprofit, you state your purpose. If you start lobbying for legislation completely outside your stated purpose, the state can say you’re not doing what you promised to do, and you can lose your tax-exempt status. Again, there is room to argue both sides of these issues but, if you’re trying to make me happy, your organization avoids the problem by staying in your lane.

CE: Are board directors obliged to approve these kinds of lobbying activities that fall outside their nonprofits’ brief?

SH: Directors need to be informed about the nonprofit’s programs and operations.  The standard to meet is basically “what would an ordinarily prudent person know” if they were on a Board.  "I didn't know we did that" is not what a director would want to find themselves having to say. Directors have a fiduciary obligation to know what's going on, so ignorance is not an effective defense. This is the sort of thing that will get you in hot water as a director, if not with the Attorney General, then probably with your donors. 

CE: A lot of these nonprofits that lobbied the city are also on the receiving end of City largesse—they request and receive funding from city departments. Isn’t it a little hinky that those same nonprofits are lobbying for activities that could benefit politicians they favor, or that favor them?

SH: For the local government to be giving any of the money from its budget to a charity, the charity should be doing things that either complement or enhance what the governmental or public agency does. So, if you're feeding the homeless, and that's part of what the City does, and you've got a soup-kitchen, and maybe you do it more efficiently than what the government could do, it makes some sense for the government to help fund that.

But if the soup kitchen turns around and uses the money to lobby the city for, say, more teacher’s pay or something that is not within their core function, there’s arguably a disconnect there. 

More from Scott Hartley can be found here.

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