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Public and private foundations may engage in a variety of public policy grantmaking activities, but there are some legal restrictions to be aware of that differ depending on the status of your foundation. Below are links to a number of easy-to-understand resources for legal information.
While these resources are extensive, you should obtain specific legal advice as you develop public policy grantmaking programs.
Before a foundation engages in public policy grantmaking, it should assess internal capacity. The public policy process is mercurial and can require long-term involvement that sometimes puts you in the public eye. Foundation leaders, including staff, board members, and trustees, should fully discuss the policy issue and possible scenarios.
Internal commitment to the grantmaking effort, including agreement on underlying politics, a willingness to take on any perceived risk, and a long-term vision for the foundation's role will help ground the foundation's efforts and guide staff. It is best to discuss possible challenges and opportunities before they arise.
While internal expertise is not necessary for successful public policy grantmaking, staff stability is important. Long-term efforts to nurture connections and relationships are vital to successfully impacting policy.
Public Foundations
Public foundations are under the same IRS restrictions as other public charities when it comes to engaging in and funding lobbying and other public policy strategies. Unlike private foundations, a public foundation may itself lobby and may earmark a grant for lobbying, but must count the amount of the earmarked grant against its own overall and grassroots lobbying limits. The grant will also count against the grantee's lobbying limits. The following resources detail these restrictions as well as permissible activities.
General Information
"Community Foundations and Public Policy" Center for Lobbying in the Public Interest
Frequently Asked Questions about Nonprofit Lobbying, Center for Lobbying in the Public Interest
"Investing in Change: A Funders Guide to Supporting Advocacy" Alliance for Justice
"Public Foundation Representatives Can Safely Visit Legislators" Alliance for Justice
501(h) election
In order to maximize its ability to engage in public policy advocacy, public charities may opt to take the 501(h) election under the IRS Revenue Code. This allows a public charity to be extensively involved in lobbying and provides clear definitions for, and limits around, lobbying efforts. Generally, small organizations that opt for the 501(h) election have much more leeway to engage in lobbying than organizations that do not take the election. However, large public charities (with annual budgets in the tens of millions of dollars) may be better off not taking the 501(h) election.
Resource LinksUnlike public foundations, private foundations are restricted by the IRS from lobbying themselves or from earmarking grants for lobbying activities. However, these restrictions need not stop private foundations from impacting public policy.
There are three different ways for a private foundation to make grants to public charities for public policy work.
First, private foundations may support public charities that engage in lobbying through general support grants. To protect the private foundation, however, the grant must truly be for general support - it should not be earmarked or restricted at all. That ensures that any lobbying use of grant funds was entirely in the sole discretion of the grantee's governing body, and therefore not attributable to the private foundation funder in any way. General support grants are the simplest and safest way for a private foundation to support a public charity's public policy work. (General support grant agreements should not prohibit the grantee from lobbying, since that eliminates the grantee's ability to direct those funds toward its lobbying efforts. A grant agreement that states that the grant is "not earmarked for lobbying" fully protects the private foundation, without tying the hands of the grantee.)
Second, private foundations may earmark grants to public charities for projects that involve non-lobbying strategies for influencing public policy, as described in the How to Engage in Public Policy section of this Toolkit. These strategies include:
community organizing
building coalitions
non-lobbying issue advocacy
litigation
research and analysis
regulatory advocacy
A private foundation grant that is earmarked for a non-lobbying project of the grantee may include a prohibition on lobbying with grant funds.
Third, private foundations may even earmark grants to public charities for projects that involve some lobbying, provided the private foundation's total funding of the project is less than the project's budget for non-lobbying activities. This is sometimes referred to as a McIntosh grant. Consult the resources listed below for further details on how such grants should be documented.
The following resources provide information about how private foundations can engage in and support public policy efforts without violating IRS regulations:
"A Guide to Programming Under IRS Public Policy Rules" W. K. Kellogg Foundation
Can a Private Foundation Make a Grant to a Non-Public Charity? Alliance for Justice
"Investing in Change: A Funders Guide to Supporting Advocacy" Alliance for Justice
"Legislative Visits by Private Foundations" Alliance for Justice
Private Foundations and Policymaking section, NP Action
"Private Foundation Funding of Advocacy" by Rosemary Fei, Silk, Adler & Colvin
"Private Foundation Lobbying Exception: Nonpartisan Analysis" by Rosemary Fei, Silk, Adler & Colvin
Funding 501 (c)(4) OrganizationsPublic policy advocacy is often conducted within the nonprofit sector by the following types of organizations exempt under other sections of the IRS Code than Section 501(c)(3):
Section 501(c)(4) social welfare organizations
Section 501(c)(5) unions
Section 501(c)(6) trade and professional associations, business leagues, and chambers of commerce.
These non-charitable organizations can conduct any activities permitted to a Section 501(c)(3) public charity, plus unlimited legislative lobbying and some partisan candidate electioneering without violating their tax-exempt status.
Private foundations can legally make grants to Section 501(c)(4) and other non-501(c)(3) organizations, but this is not a way to circumvent the tax-law limits on public policy activities of Section 501(c)(3) organizations. This is because private foundations can only fund the activities of these non-charitable organizations which could have been legally conducted by a Section 501(c)(3) public charity. For this reason, grants by private foundations to non-501(c)(3) grantees may never be made for general support, but must instead be earmarked for a specifically identified charitable program or activity of the non-charity. Since such grants must be earmarked, however, none of the funded activities may be lobbying; but non-lobbying public policy activities such as a public charity could have conducted are fine.
All grants to non-public charities require the private foundation funder to exercise "expenditure responsibility" as described in Section 4945(h) of the IRS Code and the related regulations. Generally, "expenditure responsibility" means the private foundation must:
conduct an appropriate pre-grant inquiry
impose certain obligations on the grantee
embody said obligations in a written grant agreement
receive and review regular reports from the grantee on expenditures from grant funds
follow-up as needed in the event any grant funds are misspent
report the grant to the IRS properly on Form 990-PF as an expenditure responsibility grant
Failure to properly exercise expenditure responsibility usually results in such grants becoming prohibited taxable expenditures under Section 4945, and not counting as qualified distributions for purposes of the private foundation's minimum distribution requirement under Section 4942.
Resource Links
"Election Year Activities for 501(c)(4) Social Welfare Organizations" Alliance for Justice
"Investing in Change: A Funders Guide to Supporting Advocacy" Alliance for Justice
Funding Voter Education, Voter Registration, and Get-Out-The-Vote Efforts (GOTV) of Public Charities
Foundations and nonprofit organizations can engage in activities related to elections as long as they are conducted on a non-partisan basis. All 501(c)(3) organizations, both private foundations and public charities, are prohibited from engaging in any activity that supports or opposes candidates for public office or political parties. (And of course public charities and foundations are restricted in, and private foundations are prohibited from, lobbying on pending legislation.) However, public charities can be involved in a range of permissible nonpartisan election-year activities that public and private foundations can support.
Voter Education and GOTV Activities
Private foundations are legally permitted to fund any voter education activities concerning candidates and issues that a Section 501(c)(3) public charity is permitted to conduct. These could include information provided to voters on issues in an upcoming election, voter guides comparing candidates' positions on a range of issues, and candidate debates. As long as these activities are conducted in a wholly nonpartisan manner (not promoting or opposing any candidate), as interpreted under IRS guidance, public charities may engage in such activities without limits imposed by their tax-exempt status. Private foundations may make grants earmarked for such activities. Any advocacy funded by earmarked grants from a private foundation must not qualify as legislative lobbying, which private foundations may not fund directly. Private foundation support of issues without funding lobbying is discussed in the Private Foundation section on the previous page.
Voter Registration
If voter registration is involved, private foundations are subject to different rules than their public charity grantees. A public charity can conduct general public voter registration drives, or voter registration efforts targeted to specific groups of people who are either historically underrepresented in our democratic process or are the charity's natural constituents, as long as the activity is carried out in a nonpartisan manner, as provided in IRS guidance.
Private foundations are subject to much stricter rules on what voter registration activities they may fund. To be eligible for private foundation funding, voter registration activities must be conducted in at least five states and over at least two election cycles. All associated rules are found in Section 4945(f) and regulations thereunder.
Public charities conducting qualifying voter registration activities who seek private foundation funding can obtain a letter from the IRS determining that they and their activities meet the requirements of Section 4945(f). If a grantee can provide such a letter, the private foundation may earmark its grant for those voter registration activities, as long as the grant is not earmarked for use in any specific state or election cycle. Without such a letter from the IRS, a private foundation may still fund the voter registration activities if it makes its own determination that the requirements of Section 4945(f) will be met. Alternatively, a private foundation may make a general support grant to a public charity that conducts voter registration activities, without regard to whether those activities meet Section 4945(f) requirements.
Voter Education, Voter Registration and Get-Out-The-Vote Efforts Resource Links
"Election Activities of Individuals Associated with 501(c)(3) Organizations" Alliance for Justice
"Election Year Politics," by Jane C. Nober and Kelly Shipp Simone, Foundation News and Commentary
"Foundations May Host and Support Candidate Forums" Alliance for Justice
"Foundation Support for Election-Related Activities" Alliance for Justice
"Investing in Change: A Funders Guide to Supporting Advocacy" Alliance for Justice
Activities Related to State Ballot Initiatives
Both public charities and private foundations can play significant roles in state ballot initiatives. Although initiatives appear on a ballot and are voted on at an election, they are considered legislation by the IRS, and therefore subject to the tax law limits (for public charities) and prohibitions (for private foundations) on all legislative lobbying activities. Ballot measure activities do not fall within the prohibition on partisan candidate-related electoral activities.
However, in addition to complying with federal tax laws on lobbying, ballot measure campaigns and activities are subject to state and local regulation under generally applicable election and campaign finance disclosure laws. Before advocating for or against a ballot measure within their lobbying allowance, public charities should determine what reporting or registration their activities may trigger under state or local laws. Even though private foundations are more limited in their potential ballot measure activities, they may also be affected by these state or local disclosure rules.
NCG published two guides that detail federal and state regulations that affect private foundations and public charities engaged ballot initiative activities in California, but laws differ from state to state, so other resources should be consulted for activities outside of California.
Other resources:
"Foundations and Ballot Measures: A Legal Guide" Alliance for Justice
Grant Agreement Language
Although not required by law, many foundations include a prohibition against lobbying within their grant agreement letters. While well intentioned, this practice is overly cautious in most situations and can unduly restrict the ability of nonprofits to respond to policy opportunities and changes.
Resource Links
"Grant Agreement Letters and Advocacy" Alliance for Justice
"Investing in Change: A Funders Guide to Supporting Advocacy" Alliance for Justice
Technical Assistance and Resources—Grant Agreements, Alliance for Justice
What Your Grantees Can Do
The following resources contain information on the legal parameters for 501(c)(3) nonprofit organizations. These resources may be useful to funders to better understand what their grantees can do, as well as to nonprofit organizations themselves.
"A Summary of the Laws Governing Lobbying by 501(c)(3) Organizations" by John Pomeranz, Alliance for JusticeGeneral Information
"Foundations and Lobbying: Safe Ways to Affect Public Policy" by John Edie, Council on Foundations
Lobbying Law Online Tutorials, Charity Lobbing in the Public Interest
"Myth v. Fact—Foundation Support of Advocacy" by Thomas R. Asher, Alliance for Justice
From http://www.ncg.org/toolkit/html/gettingstarted/legalparam/print_legalparam.html
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