Protecting private foundations amid the uncertainty of new tax laws

ARTICLE | November 27, 2024

Authored by RSM US LLP

Executive summary: Private foundations and lobbying

In 2025, we are almost certain to see new tax laws, some of which may affect the charitable sector. Previously introduced legislation may find new support, and entirely new proposals may have a path forward.

Could provisions affecting private foundations’ qualifying distribution requirements from the Accelerating Charitable Efforts (ACE) Act find new life? Will the lame duck Senate pass the Stop Terror-Financing and Tax Penalties on American Hostages Act (H.R. 9495), Section 4 of which gives the Treasury Secretary broad authority to designate a tax-exempt organization as “terrorist supporting organizations,” resulting in suspension or loss of tax-exempt status? Will other proposals impede the ability of a private foundation from generating revenue and operating in furtherance of its exempt purposes?

To the extent that specific legislation may affect a private foundation’s existence, its powers and duties, its tax-exempt status, or the deductibility of contributions, a private foundation may engage in direct lobbying activity.

The self-defense exception

Although section 4945(d)(1) generally prohibits private foundations from engaging in lobbying activity, section 4945(e) and the regulations (Treas. Reg. section 53.4945-2(d)) set forth a number of exceptions:

1. Providing nonpartisan analysis, study, or research to the general public or legislative officials;
2. Examinations and discussions of broad social, economic, and similar problems;
3. Providing technical advice or assistance to a requesting legislative body; and
4. Self-defense communications to a legislative body concerning a decision that might affect the private foundation’s existence, powers and duties, tax-exempt status, or deductibility of contributions.

This self-defense exception applies exclusively to direct lobbying, i.e., communications with an entire legislative body, its committees or subcommittees, individual legislators or members of their staffs, or representatives of the executive branch that are involved in the legislative process. Private foundations may not use this exception to engage in grassroots lobbying, i.e., communications with the general public with respect to the legislation.

Washington National Tax takeaway

Whether concerned with current initiatives, like H.R. 9495, or newly introduced legislation, private foundations can lobby against legislative proposals that would affect their exempt status or their ability to conduct activities that further their mission. Provided that such lobbying is done directly with legislators or those with the ability to directly affect the legislation’s passage, such expenditures will not constitute lobbying expenditures for purposes of section 4945. Therefore, there will be no excise tax consequences to the private foundation.