Good News from the IRS for Public Charities that Give Grants
Issues: Free Speech Rights of Nonprofits
A new ruling from the Internal Revenue Service indicates that they will allow public foundations or other public charities that have made the 501(h) election to rely on the rules that already govern grantmaking by private foundations. This is good news for community foundations and all other public charities (what most people think of as “nonprofits”) that make grants.
While private foundations have had the benefit of clear IRS guidance on how they can support public charities that lobby, foundations, such as community foundations and women's funds, along with other public charities that make grants or "re-grant" have not had that clarity. Alliance for Justice requested a ruling from the IRS in 2005 in an effort to resolve the uncertainty for public charities.
“This is an important clarification for the nonprofit sector,” said Nan Aron, President of Alliance for Justice. “For the first time, public charities have guidance on how to treat grants to groups that lobby. We hope this clarification will give more grantmakers the confidence they need to fund aggressive advocacy.”
While this IRS ruling only applies directly to Alliance for Justice, it reflects the approach the IRS will likely take in the future in evaluating grants from one public charity (or public foundation) to another.
The following is a summary of the four main points of the IRS Private Letter Ruling (in bold) and further explanation of each point.
I. A public charity (including community foundations, many women's funds, and other public charities that make grants or "re-grant") may treat general support grants to a public charity as non-lobbying expenditures so long as the grant is not earmarked for lobbying.
Example: The “Farmville Community Foundation” gives a $10,000 general support grant to the “Children’s Alliance of Farmville,” an organization that advocates for disadvantaged children. The Farmville Community Foundation does not have to count the grant funds against its own lobbying limit even if the Children’s Alliance of Farmville uses the money to lobby, as long the grant was not earmarked for lobbying.
II. A grant restricted for use within a specific project is not solely, by virtue of that restriction, earmarked for lobbying.
A grant provided to a public charity for a specific program, such as a health project within an organization devoted to disadvantaged children, rather than its general operations, is not automatically assumed to be lobbying, even if the program includes a lobbying component.
III. A public charity, including a public foundation, may treat a project grant as not earmarked for lobbying if the grant amount, combined with its other grants for that project during the year, does not exceed the non-lobbying portion of the project’s budget (and it does not doubt, or have reason to doubt, the budget information provided by the grantee).
When making a specific project grant, the grantor must review the grantee’s project budget and may give a grant (combined with any other grants given that year to the same project) in an amount up to the non-lobbying portion of the budget. As long as there is no agreement that the grant is otherwise earmarked for lobbying, the funds will not be counted against the public foundation‘s lobbying limits.
IV. When making a specific project grant, if the amount of the grant exceeds the non-lobbying portion of the project budget, then the public charity must treat as a lobbying expenditure the amount by which the grant exceeds the non-lobbying amount.
If a specific project grant exceeds the amount budgeted for non-lobbying activities, only the amount in excess of the non-lobbying activities will be considered a lobbying expenditure for the grantor. This treatment is consistent with the regulations for private foundations.
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