Charitable Deduction: Private Foundation Lobbying Activity and the Self-Defense Exception

It has come to our attention that the question of whether or not private foundations can engage in advocacy around the charitable deduction within tax reform is under discussion within the sector. Good news, the answer is a clear yes.

Generally, private foundations are not permitted to use foundation assets to carry on propaganda or to attempt to influence legislation through communications with legislators or any government official or employee who may participate in the formulation of legislation, or by attempting to affect the opinion of the general public or any segment thereof. Such direct and grassroots lobbying activities will subject the foundation, and in some cases individual foundation managers, to a penalty tax under Section 4945 of the Internal Revenue Code. There is however, an exception to this prohibition found in the Treasury Regulations at §53.4945-2(d)(3) and commonly referred to as the “self-defense exception.” Specifically, this exception allows a private foundation to communicate with a legislative body regarding legislation that affects the “existence of the private foundation, its powers and duties, its tax-exempt status or the deductibility of contributions to such foundation.”

As part of comprehensive tax reform, it is expected that legislative proposals will address the charitable deduction, as well as other tax provisions that are important to tax-exempt organizations. Because “the deductibility of contributions” to a private foundation is expressly mentioned as one of the basis for the self-defense exception, the Council is confident that private foundations may engage in direct lobbying activities to protect the charitable deduction. This means that private foundations could engage in communications with legislators and staffers on this subject.

If provisions affecting the charitable deduction are included as part of a more comprehensive tax reform bill, the conservative approach for private foundations would be to limit direct lobbying communications to those portions of the bill that address the charitable deduction and any other provisions that affect the existence of the private foundation, its tax-exempt status or the powers or duties of the private foundation. However, understanding the practical problems this may present, the Council has previously taken the position that private foundations may advocate for the passage of a bill that includes one or more provisions that would qualify for the self-defense exception, even if other portions of the bill do not. For example, when simplification of the private foundation excise tax is included in a bill with other provisions that may not directly affect the existence, powers or duties of a private foundation, it is the Council’s position that the private foundation may still contact legislators urging support for the bill.  

It is important to note that the self-defense exception is not available for activities that would constitute grassroots lobbying—such as encouraging grantees or others to contact their legislators.

Finally, the Council respects its members’ own determinations regarding legal issues, and individual policies or practices related to lobbying activity. We encourage members to consult with their own legal counsel regarding any questions.