IRS Seeks to Impose Curbs on Lobbying by Charities

The Reagan Administration, which has cut billions of dollars from its financial support of charities since 1981, is proposing strict new limits on politically related activities by nonprofit organizations.

The Internal Revenue Service wants to apply the regulations retroactively to Jan. 1, 1977, when Gerald R. Ford was President. Attorneys who have studied the proposed rules say this would jeopardize the tax exempt status of thousands of major nonprofit organizations chartered under Section 501(c)(3) of the Internal Revenue Code and thus are eligible to receive tax-deductible gifts.

While charities are often thought of as instruments to aid the poor, only about 10% of charities do that. Many organizations, declared to be charities by the IRS, serve the wealthy and middle class, operate institutions such as Harvard University or the Music Center of Los Angeles County or exist to promote public awareness of issues. Charities exist that favor both more and less defense spending, for example.

The proposed regulations would vastly expand the definition of grass-roots lobbying, in which an organization urges its members to contact their legislators. Under the proposals, a newsletter that informs a charity’s members about issues of interest to them would be considered grass-roots lobbying, which is limited to 5% of each charity’s total spending.

In addition, private foundations would be liable for taxes if they made a grant to a charity for an amount greater than the charity can legally spend on lobbying, even if the grant was earmarked for a specific purpose unrelated to lobbying.

The rules also would require extensive bookkeeping and limit the practice of some charities in creating affiliated organizations to inflate the sums they can spend on lobbying.

Critics say the new regulations would inhibit the ability of charities to inform their members about society’s problems. They would inhibit drug abuse prevention groups from explaining ineffective narcotics laws to their supporters and prompt major foundations like the Ford Foundation, whose grants were crucial to the civil rights movement, to stop financing groups seeking social change, these critics say.

The regulations also would restrict severely direct mail fund-raising campaigns, critics said. The IRS would consider appeals for money to be grass-roots lobbying rather than fund-raising activities if as little as one sentence in the appeal referred to legislation.

The proposed regulations, published in the Nov. 5 Federal Register, would begin taking effect Feb. 3, unless the IRS extends the current period for public comment or orders public hearings or Congress acts to block them.

10% of Nation’s Wealth

Leaders of mainstream and liberally oriented charities said the proposals are part of a continuing Reagan Administration campaign to hamper its critics in the charity business, which employs one of every 18 American workers and owns 10% of the nation’s private wealth.

While President Reagan has repeatedly called for more private sector initiatives, his Administration has cut funds to charities by at least $30 billion, according to an Urban Institute study. These actions generated intense criticism from many nonprofit organizations that rely on government contracts and grants and have even spawned the creation of such new tax exempt agencies as OMB Watch and the Center on Budget and Policy Priorities, whose charitable purpose is to educate the public about federal spending.

But leaders of charities funded by the New Right said the regulations, while needing refinement, are vital to ending abuses by charities across the political spectrum. These New Right charity leaders said one major abuse is charging lobbying and advocacy costs to budgets for “public education.”

Across the board, national charity leaders told The Times that the proposed rules are the most critical issue now facing America’s estimated 325,000 nonprofit organizations.

Adverse Effect Seen

“If adopted unchanged, these regulations will have a significant adverse effect on most charities in the United States,” said Steven Simpson, a Raleigh, N.C., attorney who represents 150 mainstream charities. “The regulations are another example of the Internal Revenue Service’s intense dislike for charities.”

James Joseph, president of the Council on Foundations, which represents 1,400 large philanthropic endowments, said he views the regulations with great concern. “Foundations are naturally timid about getting involved with policy-makers in the first place . . . these new regulations would make them very timid about having any involvement that might be construed as advocacy.”

Brian O’Connell, president of Independent Sector, an umbrella organization for 300 major charities and 300 foundations and corporations that are major contributors to charity, said: “The regulations go quite beyond the intent of Congress and will have a further chilling effect on nonprofit organizations fulfilling their appropriate and, we feel, lawful lobbying actions.

Advocacy Defended

“Advocacy is often the best service a charity can render,” O’Connell said. “We think it is better, in the case of a charity concerned with special education, for example, to seek more hiring of teachers by school boards than to use limited dollars to hire, say, one teacher to help just a dozen children.”

Gary Bass, executive director of OMB Watch, a nonprofit organization whose studies of the federal budget have been critical of Reagan Administration policies, said: “There is a tremendous fear by most of the nonprofit community which understands the implications of these proposals.”

Officials of New Right-funded charities, which have flourished in the ‘80s, indicated that they do not share this alarm.

“It may well be that some of the IRS regulations draw the line a little too tightly, but that where we have drawn the existing line is leaving a lot of loopholes that are being exploited strikes me as being beyond a doubt,” said one of these officials, Leslie Lenkowsky, president of the Institute for Educational Affairs.

Lobbying Disguised

Lenkowsky, a frequent critic of liberal and leftist charities, said charities on both sides of the political spectrum disguise grass-roots lobbying as educational activity. “Anyone observing the nonprofit world has to be a bit nervous that we have let a lot of things pass as educational that were really political,” Lenkowsky said.

Wilma Johnson, chairman of the Capital Research Center, a New Right research charity, said regulations to carefully define lobbying by nonprofit organizations “have been needed for some time. These regulations may affect the left more than the right, but only for the reason that I think there are many more organizations on the left, going back to the ‘30s.”

The proposed regulations would reinterpret the 1976 Tax Reform Act, which allows charities to spend 20% of their budgets up to $1 million on lobbying, including grass-roots lobbying.

Many Deny Lobbying

Because of the $1-million cap on lobbying, many large national charities elect to be governed by a provision that “no substantial part” of their activities may be legislatively related.

Many large charities deny that they do any lobbying. The American Heart Assn., for example, which expects to raise about $200 million this year and which played a major role in legislation requiring new cigarette package warning labels, said its activities are entirely educational.

Under the proposed IRS regulations, nonprofit attorneys said, unbiased studies distributed to a charity’s members would be considered grass-roots lobbying expenditures because the study’s audience is individuals “likely” to have a similar viewpoint.