Guest Essay -- Seeking Nessie!

Today we have the privilege of offering a guest essay from a PRU reader, Seeking Nessie, that takes a broader view of the process of public policy creation, as well as some of the legal foundations and guiding principles of tax-exempt organizations that engage themselves in political activity.

It's long. And we very much feel it's worth your time. We hope you find it as well researched and written as we did.



Dear All,

I write to you as "Seeking Nessie In Park Ridge." Like the famed Scottish beastie which exists solely in folklore (and, perhaps, in a few grainy pictures), sound city governance in Park Ridge, free of cronyism, back-room deals, and fiscal ineptitude, seems to be a mythical thing, hiding somewhere deep and unconfirmed in the back rooms of City Hall, or perhaps, in the dark waters of Murphy Lake. I'm still looking for it, perhaps - probably - in vain. I may be better off focusing my efforts on tilting at windmills. But for now, I remain Seeking Nessie.

First, a brief primer on the rules of what kinds of activities exempt organizations can engage in without endangering their exempt status. Lobbying by nonprofits is perfectly legal and supported by the Internal Revenue Service's regulations. There are several categories of exempt organizations, including those exempt under Internal Revenue Code Section 501(c)(3) (charitable, scientific, educational groups) and under Internal Revenue Code Section 501(c)(4) (social welfare or action groups). Under IRS regulations, entities exempt from taxation under Section 501(c)(3) - such as churches, and integrated auxiliaries of a church or of a convention or association of churches - have strict limits on the amount of lobbying they can conduct.

While there are treatises on exempt organizations that are tremendously dense and highly informative, one would surely have consumed a yearly supply of roughage by the time one digested even one of them. However, the American Association of Family and Consumer Sciences ("AAFCS") provides about as good of an explanation as any of what constitutes "lobbying" as is available for the general public:

The following excerpt from the AAFCS site (http://www.aafcs.org/PPToolkit/advocating.htm) is helpful:

"Lobbying Activities: . . . lobbying (or more precisely, "influencing legislation") is defined in Section 4911 of the Internal Revenue Code as:

"Any attempt to influence any legislation through an attempt to affect the opinions of the general public or any segments thereof; or

"Any attempt to influence any legislation through communications with any member or employee of a legislative body, or with any government official or employee who may participate in the formulation of the legislation.

"According to IRS regulations, a tax-exempt organization is attempting to influence legislation if it:

"Contacts or urges the public to contact members of a legislative body for the purpose of proposing, supporting, or opposing legislation; or

"Advocates the adoption or rejection of particular legislation.

"Section 4911 of the IRS Code also lists exceptions to the term "influencing legislation." These activities include:

"Making the results of non-partisan analysis, studies, or research available.

"Providing technical advice or assistance in response to a written request by a government body, committee, or subcommittee.

"Appearing before, or communicating to, any legislative body with respect to a possible decision by that body that could affect the organization's existence, powers, and duties, its tax-exempt status, or the deduction of contributions to it.

"Communicating with its members regarding legislation or proposed legislation of direct interest to the organization or its members, unless the communication directly encourages the members to become involved in direct or grass roots lobbying.

"Communicating with government officials or employees on routine matters."

NonProfitExpert.com (http://www.nonprofitexpert.com/political.htm) also provides some useful information:

"An organization will be regarded as attempting to influence legislation if it contacts, or urges the public to contact, members or employees of a legislative body for the purpose of proposing, supporting, or opposing legislation, or if the organization advocates the adoption or rejection of legislation."

Sound like something we've seen around Park Ridge lately? I thought so.

There is certainly a colorable argument that what the "Bully Pulpit Crew" ("BPC") is doing falls within the definition of "influencing legislation". The members of the BPC would be well-advised to look hard at the responsibilities they must shoulder when bestowed with the benefits of being tax-exempt. I would like to suggest that they take a moment to review a straight-from-the-horse's-mouth guide (where "horse" equals "Internal Revenue Service") which has been written at a reasonably readable level. The IRS's version of "Tax Exempt Organization Rules for Dummies" may be found at
http://www.irs.gov/pub/irs-pdf/p1828.pdf.

I realize that "reasonably readable" is a relative term, but bear with me.

Now, let's talk about one of the horrible little hoops that the BPC's various organizations must jump through in order to maintain their tax exempt status.

Entities exempt from taxation under Section 501(c)(3), excluding churches and private foundations, can choose between two sets of guidelines for measuring whether their attempts to influence legislation constitute impermissible lobbying activities: a measure based purely on expenditures (the" Expenditures Test"), and a more facts-based "Substantial Part Test". The Expenditure Test is mathematical and set out under the Internal Revenue Code, Sections 501(h) and 4911. The Expenditures Test requires dividing the amount of funds used by an entity for lobbying purposes by the total budget of that entity to determine if the lobbying expenditures exceeds a permissible percentage. It also requires determining if certain types of lobbying exceed a permissible percentage of the total permissible lobbying expenditure.1

Fortunately for the purposes of this little foray into the world of exempt organizations, we don't have to look at the Expenditures Test, because after all, math is hard. Or at least one would surmise it to be for those who believe that the opinions of a few control the governance of the whole. But I digress.

Groups that do not - or can not - elect to use the Expenditure Test must submit to the "Substantial Part Test." As the name would imply, an organization’s attempts to influence legislation may not constitute a "substantial part" of its activities. The IRS measures compliance with the “Substantial Part Test" on the basis of “all the pertinent facts and circumstances of each case,” determined under a variety of factors such as the time devoted (by both paid and volunteer workers) and the expenditures devoted to the activity by the organization. Courts have interpreted this test in a variety of ways, from a 5% safe harbor (1955), to a ruling that percentages test are inappropriate (1972). Although the precise percentage of activities that rise to the level of "substantial part" has never been fully defined, the definition of lobbying under this test is not limited to expenditures of money. In other words, activities of volunteers to influence legislation must also be counted as lobbying.

While it seems clear that the BPC is attempting to "influence legislation", the harder question remains "Do the lobbying efforts of the various BPC entities constitute a "substantial part" of their activities?"

This I could not opine on - I simply do not know enough about any of these congregations, and as someone who once owned a t-shirt that read "I Survived Catholic School", I don't care to.

Moreover, while I am an attorney with more than a passing familiarity with tax law, I don't profess any particular expertise in the subtleties of exempt organizations. I have to imagine, however, in the great wilds of Park Ridge, there exists SOMEONE with enough expertise and experience in the matter to provide a reasonably informed judgment on the issue. Perhaps he or she is hanging out with Nessie.

I can tell you that the IRS has been focusing more scrutiny (and will continue to do so in the coming audit cycles) on the activities of exempt organizations. Exempt organizations as a group are undergoing far more scrutiny now on a number of fronts (excessive officer compensation, below-market loans to key company officials, and other interactions with officers placing the company in an unfavorable position). However, "political intervention" is an especially hot topic, given the pending election season.

A report issued by the IRS in 2006 (
http://www.irs.gov/pub/irs-tege/2006paci_report_5-30-07.pdf) found a "disturbing amount of political intervention" by churches and non-profit groups during the 2004 presidential campaign. The IRS survey of 82 non-profits and churches found nearly three-quarters "engaged in some level of prohibited political activity." The IRS's Political Activities Compliance Initiative (PACI) will remain in effect for the 2008 election season.

Again, as to whether the activities of the BPC rise to a prohibited level, I am not qualified to opine. But they sure do tend to give me the cold and pricklies.
And finally, because I'm feeling particularly expository today, I note that the PADS issue can very easily become a very tricky electoral issue.

Without dismissing the importance of the numerous other issues to be considered in the next round of local elections, such as the pandering to "pay to play" campaign contributors (cum zoning variance seekers), the favoring of environmental cleanup dodgers, and the grubbing around in other financial boondoggles (the City is paying what for the Ekl report? the City proposed to spend how much on a feasibility study for the Frimark Memorial Highway and Underpass?), the PADS issue has proven its potential as a divisive, galvanizing topic. While one hopes that it will not be the case, PADS might - just might - have the potential of sneaking past - or at least running even with - pocketbook politics or kitchen table economics in the minds of voters.

Those voters who don't comprehend the fundamental wrongness of what the BPC and its minions are trying to accomplish, on both the "undue influence on government" front and the "imposition on the rights of the larger community" front, could easily seize on a mayoral or aldermanic candidate's stated opposition to permitting PADS to come rampaging into town as an unrestrained Godzilla (PADSzilla? with all appropriate imagery intact) as a basis to reject that candidate in the next round of City elections.

Obviously, there is a critical difference between "our city prohibits ALL homeless shelters" (with the subtext of "you bad, bad, uncaring, bigoted, and selfish people") and "our City chooses to regulate the location and operation of homeless shelters." For some, this difference presents a degree of subtlety that they are incapable of grasping.

I would say that (sadly) an unacceptably high percentage of residents in Park Ridge either (a) are not tuned in to the critical analysis of the issues offered by the PRU, PubDogs, or those individuals who have worked so tirelessly to craft sensible and reasonable regulations; or (b) are aware of, but actively choose to ignore, such analysis. These individuals are far more likely to take the easy and less mentally challenging route of voting for the pro-PADS candidate that their BPC leaders direct them - or coerce them - to vote for.

We can ill-afford to under-estimate the logistical and strategic concerns that will be faced by those current and potential leaders who actually understand the issues and the problems associated with PADSzilla in their bid to win or retain positions in the next round of City elections. But more importantly, as residents and social commentators (action item coming up!), it would be prudent to remind folks early and often that everyone can complain as loudly as they want to about the (in)competencies of certain of our elected leaders, but if one doesn't take the effort to campaign for, volunteer for, advocate for, or at the very least, vote for candidates whom one feels will do a better job, one becomes part of the problem.

Best regards,
Seeking Nessie In Park Ridge