Christopher DeLacy and Robert Tomkins are Partners and Kenneth Parsons is an Associate in Holland & Knight's Washington D.C. office
Although 501(c)(4) organizations have been in the news recently for potentially engaging in too much political activity, it is worth noting that a relatively obscure Senate amendment from 1995 prohibits lobbying by certain 501(c)(4)s. While the Internal Revenue Code permits entities exempt from federal taxation under section 501(c)(4) of the Internal Revenue Code (IRC), known as social welfare organizations, to engage in almost unlimited amounts of lobbying, the Lobbying Disclosure Act (LDA) prohibits these organizations from engaging in federal lobbying activities if they receive a federal grant, loan, contract or other award. Specifically, Section 18 of the LDA, known as the "Simpson Amendment," makes 501(c)(4) organizations that engage in federal lobbying activities ineligible for any federal grant, loan, or award. Former Senator Alan Simpson (R-WY) offered this amendment back in 1995 as an attempt to limit "...Congress' gifts to lobbyists in the forms of grants, loans, and other benefits."
Accordingly, 501(c)(4) organizations that receive federal grants, loans, or award, must refrain from engaging in federal lobbying activities. Likewise, 501(c)(4) organizations that engage in federal lobbying activities may not seek federal grants, loans, or awards. 501(c)(4) organizations that receive federal funds must be mindful that this prohibition goes beyond making "lobbying" costs unallowable. It is an outright prohibition. So merely segregating lobbying costs from allowable cost pools does not render a 501(c)(4) organization compliant with the Simpson Amendment.
However, there are also several important exceptions to this rule. First, the Simpson Amendment does not prevent any 501(c)(4) organization from engaging in grass roots and other types of advocacy outside the scope of the LDA's current definition of "lobbying activities." Also, as Senator Simpson himself pointed out while his amendment was being considered, a 501(c)(4) that receives federal awards may establish a separate, but affiliated 501(c)(4) that may engage in lobbying activities – something he and former Senator Carl Levin (D-MI) referred to at the time as "splitting." The Supreme Court made a similar point in Regan v. Taxation With Representation, 461 U.S. 540 (1983) regarding a 501(c)(3) organization's ability to form a 501(c)(4) lobbying affiliate.
The Simpson Amendment does not apply to 501(c)(3) charitable organizations, 501(c)(6) trade associations, or other exempt organizations aside from 501(c)(4)s. 501(c)(3)s, of course, have lobbying restrictions imposed by the IRC. The Simpson Amendment also should not be confused with another, more famous, lobbying restriction, the Byrd Amendment, which prohibits the use of appropriated federal funds to lobby in connection with federal contracts, grants, and other awards. Finally, the Office of Management and Budget (OMB) places additional lobbying restrictions on non-profits when using federally appropriated funds and a federal criminal statute bans the use of federally appropriated funds to engage in lobbying.
501(c)(4) organizations that receive federal funding should take stock of whether they are engaging in lobbying activities, as defined by the LDA. They would also be well-served to consider contractual terms mandating compliance with the LDA, including the Simpson Amendment, from entities with which they partner. Finally, they should ensure that their compliance and internal control systems have adequately addressed these issues.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
