Q&A #141 – Does a grant recipient’s lobbying count towards the grantor’s lobbying limits?
Question: I am the Executive Director of a 501(c)(3) organization that will be making a grant to another organization for certain advocacy activities, some of which may include grassroots lobbying. If this organization engages in lobbying will that count towards my organization’s lobbying limits?
Answer: A grant to an organization that engages in lobbying may count towards the grantor’s lobbying limits, depending on how the grant is structured and the tax-exempt status of the grantee. In summary, grants to a 501(c)(3) organization generally do not count towards the grantor’s lobbying limits unless specifically earmarked for lobbying activities, while grants to a non-501(c)(3) organization do not get this treatment unless structured to meet the requirements of a “controlled grant.”
The Treasury Regulations on this subject (see Treas. Reg. § 56.4911-3) are complex and technically apply only to 501(c)(3) public charities that have made the “501(h) election” to measure lobbying activities by expenditures, which is generally recommended for most public charities. Also, different rules apply to grantors that are 501(c)(3) private foundations rather than public charities. For clarity, this piece will assume that your organization is a public charity that has made the 501(h) election.
Under these regulations, grants made to other 501(c)(3) organizations are treated more favorably, with only the portions of the grant that are earmarked for direct lobbying and/or grassroots lobbying activities treated as lobbying activities of the grantor organization. See Treas. Reg. § 56.4911-3(c)(1) and (2). Therefore, general purpose or unrestricted grants can usually be made to other 501(c)(3) public charities without concern about whether the grantee uses those funds for lobbying activities.
In contrast, grants made to non-501(c)(3) organizations (such as 501(c)(6), 501(c)(4), or taxable entities) are subject to more stringent requirements. In general, if a 501(c)(3) public charity makes a grant to a non-501(c)(3) organization and the grantee engages in lobbying activities, then all of the grantee’s lobbying activities are attributed to the grantor up to the full amount of the grant – even if the specific grant funds are not actually used for lobbying. See Treas. Reg. § 56.4911-3(c)(3).
However, there is a key exception for “controlled grants.” Under this exception, the lobbying activities of a non-501(c)(3) grant recipient will not be attributed to the grantor if: (1) the grantor restricts the grantee’s use of the grant funds to a specific project that is in furtherance of the grantor’s non-lobbying exempt purposes; and (2) the grantor maintain records establishing that the grant is in fact used for these purposes. See Treas. Reg. § 56.4911-4(f)(3). These restrictions should be set forth in a written grant agreement, as is required anyway when making grants to a non-501(c)(3) organization. Further, when relying on the “controlled grant” exception it is recommended to explicitly prohibit the grantee from using any portion of the grant funds for lobbying purposes within the meaning of section 501(c)(3).
Planning Tip – When making a grant, think carefully about the schedule and frequency of reporting required of the grantee. While some grantors default to requiring only an annual report, consider requiring the grantee to submit reports on a more frequent basis, such as a quarterly or twice-per year. This can be critical to alerting the grantor to possible compliance problems while there is still time to remedy any issues and can also be helpful when grantor and grantee use different fiscal years.
Note that these lobbying attribution rules apply not only to “grants” but also to other transfers to non-501(c)(3) organizations for less than fair market value, such as sharing of office space or other resources not made pursuant to arm’s length agreements for fair market value.
Be aware that there are multiple complexities in these rules that are beyond the scope of this Q&A. For example, there are additional ambiguities in the case of a grantor organization that has not made the 501(h) election. And the regulations also provide guidance on how allocate “direct lobbying” vs. “grassroots lobbying” expenditures that are attributed to the grantor.
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