News & Resources

Publications & Media

Attention Illinois Nonprofits! Ballot Measure Advocacy Related to the Fair Tax Amendment May Constitute “Lobbying” Under Federal Tax Law

Tax-Exempt Organizations Alert Norah L. Jones, Jodi P. Patt, Jacob L. Zerkle

After the Illinois Senate (on May 1, 2019) and the Illinois House (on May 30, 2019) voted to approve the Illinois “Fair Tax” amendment (the “Fair Tax Amendment”), one hurdle remains to amending Article IX, Section 3, of the Illinois Constitution: Illinois voters.

In November of 2020, Illinois voters will head to the polls to decide whether to exchange the State’s historically flat tax rate for a graduated, or “progressive,” state income tax system. If adopted, proponents argue that a tax rate increase on certain wealthy individuals will tax Illinois residents more fairly and generate much-needed revenue for vital state programs and initiatives, including those focused on education, healthcare, and certain social services. Opponents contend that the amendment would adversely affect small business owners and that it does not address the primary cause of the State’s budget problems — unfunded pension and health insurance liabilities. Accordingly, many Illinois nonprofit organizations may be interested in (and hoping to influence) the outcome of the vote on the 2020 ballot initiative.

Attempts by 501(c)(3) Organizations to Influence Illinois Voters on the Ballot Initiative Are “Lobbying” for Federal Tax Purposes

It is imperative that 501(c)(3) organizations recognize that efforts to influence Illinois voters regarding the adoption or rejection of the Fair Tax Amendment constitute “lobbying” for federal tax law purposes. Public charities and private foundations are subject to different but interrelated rules with respect to the amount of lobbying activity in which they may engage. In general, private foundations are prohibited from directly or indirectly engaging in any lobbying activity, and risk penalty taxes and loss of their tax-exempt status if they do. Public charities, however, may engage in an insubstantial amount of lobbying activities (as set forth in the Internal Revenue Code and Treasury Regulations) and may conduct a certain amount of “direct” and “grass roots” lobbying each year.

Congress included specific language in Section 59.4911-2(b)(1)(iii) of the Treasury Regulations so that there would be no confusion that efforts to influence a ballot initiative would constitute lobbying for purposes of the foregoing rules:

“[W]here a communication refers to and reflects a view on a measure that is the subject of a referendum, ballot initiative or similar procedure, the general public in the State or locality where the vote will take place constitutes the legislative body, and individual members of the general public area, for purposes of this paragraph (b)(1), legislators. Accordingly, if such a communication is made to one or more members of the general public in that state or locality, the communication is a direct lobbying communication (unless it is nonpartisan analysis, study or research. . . .).”

Accordingly, private foundations may not engage in efforts to influence Illinois voters on the ballot initiative for the Fair Tax Amendment, and public charities must carefully track and report their lobbying expenditures annually, including expenditures made to influence the upcoming vote on the Fair Tax Amendment, on its Form 990.

Exception for Non-partisan Analysis, Study, and Research

501(c)(3) organizations are permitted to engage in, or make expenditures for, non-partisan analysis, study, and research made available to the public. This is not considered lobbying for purposes of the taxable expenditure rules (for private foundations) or for purposes of the no substantial part or expenditure tests (for public charities). This exception applies to an independent and objective exposition of a particular subject matter that is made available to the public. Non-partisan analysis, study, or research may advocate a particular position or viewpoint so long as there is a full and fair exposition of the pertinent facts to enable the public or an individual to form an independent opinion or conclusion. Even though a particular communication may fall within this exception initially, subsequent use in lobbying may take it out of the exception.

The presence of any of the following factors is indicative of an impermissible lobbying communication:

a. The presentation of viewpoints or positions unsupported by facts is a significant portion of the communications;

b. The facts that purport to support the viewpoints or positions are distorted;

c. The organization’s presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of strong emotional feelings than of objective evaluations; or

d. The approach used in the organization’s presentations is not aimed at developing an understanding on the part of the intended audience or readership because it does not consider their background or training in the subject matter.

As an example, imagine ABC Private Foundation (“ABC”) strongly believes that the Fair Tax Amendment will strengthen the Illinois economy and also provide much-needed state funds to benefit low-income residents. ABC prepares a white paper comparing states that have adopted a graduated income tax system with those that have not, including the amount of funds allocated to assist low-income residents in each state. The paper fairly examines arguments for and against the graduated tax and ultimately determines that the Fair Tax Amendment has the greatest potential to benefit low-income residents in Illinois. Such a study would not constitute lobbying so long as it is non-partisan and includes a full and fair exposition of the pertinent facts to enable the public to form an independent opinion or conclusion.

Caution! It is important to remember that although materials originally may be classified as non-partisan analysis, study, and research (and therefore not lobbying), subsequent use of those materials in lobbying can convert the materials into lobbying. Thus, organizations wishing to prepare non-partisan materials must proceed with extreme caution before coordinating with other organizations regarding the use of those materials.

Foundation Grants to Public Charities that Lobby

Without running afoul of the lobbying rules, a private foundation may make a grant to a public charity that engages in lobbying activities, provided that (a) the grant is a general support grant that is not earmarked (via a written or oral understanding) for lobbying; or (b) the grant is a specific project grant that has not been earmarked for lobbying, and the public charity has provided a budget showing that the amount of the Foundation’s total grants to the project for the year does not exceed the project’s budgeted non-lobbying expenses for the year. Moreover, a foundation may make a grant to a public charity in order for the public charity to conduct activity that falls within any lobbying exception, including non-partisan analysis, study, and research.

Lobbying and State Law Considerations

It is beyond the scope of this article to delve into the Illinois Election Code and certain other state law considerations that may be triggered by lobbying activities. Note, however, that an Illinois nonprofit organization advocating for or against the Fair Tax Amendment may be required to register as a Ballot Initiative Committee with the Illinois State Board of Elections. The Illinois State Board of Elections has published a guide to creating and maintaining a Ballot Initiative Committee (available here).

The attorneys in the Tax-Exempt Organizations Group at Quarles & Brady regularly advise exempt organizations on their advocacy and lobbying activities. If you have any questions concerning the subject matter of this update, please contact: