March 21, 2003 Evelyn Petschek Commissioner, Tax Exempt and Government Entities Internal Revenue Service 1750 Pennsylvania Avenue, NW Washington, DC 20006 Re: IRS Examination Project on Charity LobbyingBY FACSIMILE (202-283-9973) BY FACSIMILE (202-283-9973) Dear Ms. Petschek: We, along with the Alliance for Justice and OMB Watch are writing to you to express our grave concern and dismay with the dramatic policy shift that appears to have occurred in the Internal Revenue Service with regard to the elective standards for lobbying found in section 501(h) and section 4911 of the Internal Revenue Code. Our concern has been raised by the events described in the attached memorandum and by charities that have contacted us about their impending audit by the IRS. The elective standards for lobbying in section 501(h) and section 4911 of the Code arose out of increasing concern with the 1934 “substantial part” test in section 501(c)(3) and a repeatedly stated Congressional desire that charities should be encouraged to participate more freely in the legislative process. A six-year effort beginning in 1971 to address those concerns ultimately culminated in bipartisan Congressional support for legislation creating the election. Unequivocally endorsed by Treasury, the bill passed without opposition. When first enunciated, the objective expenditure-based standards for measuring permitted lobbying activity were hailed as “a considerable improvement” over the preexisting substantial part test, as Roger Mentz, Assistant Secretary of the Treasury for Tax Policy testified in 1987. Secretary Mentz went on to note that, “the imposition of the excise tax is a more appropriate sanction for initial violations and provides fair warning, prior to revocation of exempt status, to organizations that are engaging in impermissible levels of lobbying activities.” The clear, objective standards set forth in regulations under section 4911 were viewed as appropriate and desirable by both the charitable community and the Internal Revenue Service. The regulations themselves were the product of collaboration between the Service and the charitable community through the vehicle of an Exempt Organizations Advisory Group established by Commissioner Lawrence Gibbs. Indeed, in the years following the finalization of regulations under section 4911, the Service, including the Office of the Assistant Commissioner (Employee Plans and Exempt Organizations), actively encouraged organizations to make the section 501(h) election. At the time, the Service’s efforts were met with skepticism from some organizations and practitioners who viewed the election as an “audit flag.” The Service and groups such as Independent Sector spent considerable time and effort at overcoming those misconceptions. The Service even went so far as to include language in the Internal Revenue Manual that stated that a charity that had made the election should not be selected for examination if the only apparent issue concerned the amount of lobbying undertaken. Specifically addressing the effect of the section 501(h) election, an information letter issued by the Service in 2000 stated, “the Internal Revenue Manual specifically informs our examination personnel that making the election will not be a basis for initiating an examination.” That statement of position regarding examination potential has been instrumental in answering those who counseled against making the election. If accurate, the description of the examination program currently underway in which lobbying, or more precisely, the section 501(h) election, is considered to be a “non-compliance indicator” represents a complete reversal of the longstanding position of the Service. Already, larger charities are beginning to revoke their elections as inflation has eroded the relative value of the expenditure thresholds. If not quickly, clearly and decisively reversed, the policy shift will doom efforts to encourage the smaller, more numerous charities to make the election, thus increasing the administrative burden on the Service. Examinations will become more lengthy and complex as, in the words of Roger Mentz, the “vague” and “troublesome” standards of the substantial part test are applied with increasing frequency. Perhaps most importantly, designation of the section 501(h) election as a “non-compliance indicator” is squarely contrary to the Congressional purpose in enacting the provision. As such, it constitutes a severe deterrent to charities’ participation in the public policy process. We would very much like to meet with you as soon as possible to discuss the implications of the preceding situation and to identify ways in which the Service can affirm that charities should make the 501 (h) election and that it will not trigger an audit. Please contact me at 202-387-5048 and thank you for considering our request. Sincerely, Bob Smucker