When Should a 501(c)(3) Consider Creating an Affiliated 501(c)(4)?

Closeup of businessman making decision whether to accept or deny a suggestion or employee.

501(c)(3) organizations have numerous tools at their disposal for achieving their charitable purposes, and also have the distinct advantage of being able to receive contributions that are generally tax-deductible for donors.  However, in exchange for tax-exemption and the ability to receive deductible charitable contributions, the law places some limitations on the permissible advocacy-related activities of 501(c)(3) organizations.  These limitations have led some 501(c)(3) organizations to make use of affiliated 501(c)(4) social welfare organizations, which are generally subject to fewer limitations and restrictions, to best further their common primary mission.

The limitations associated with 501(c)(3) exempt status include a complete prohibition on engaging in any activities that constitute intervention in a political campaign and a requirement that no more than an insubstantial amount of a 501(c)(3)’s activities constitute lobbying.  While we unfortunately do not have a clear definition of “insubstantial” in this context, as we’ve previously written about on this blog, many 501(c)(3) organizations have the option of making the election under IRC Section 501(h) to have their lobbying activities measured based solely on expenditures.  Section 501(h) also offers fairly generous thresholds for permissible lobbying expenditures by an electing organization.

Nonetheless, some 501(c)(3)s find that they could more effectively pursue their missions through lobbying or election-related activities beyond those permissible for 501(c)(3)s.  In that case, forming an affiliated 501(c)(4) organization may be an attractive option.

Unlike 501(c)(3)s, 501(c)(4) organizations are permitted to engage in an unlimited amount of lobbying activities, provided such activities are in furtherance of the organization’s social welfare purposes.  They may also engage in a limited amount of political campaign intervention activities, so long as such activities are secondary to their general social welfare activities.  Because of the greater flexibility that 501(c)(4)s have in these areas, they can be a great tool for effectively furthering a social welfare mission.

Once you’ve decided to form an affiliated 501(c)(4), you may find our post on the step by step process for creating a 501(c)(4) helpful.  However, before launching into forming a new entity, here are a few things to consider:

  • Capacity – In creating a separate 501(c)(4), you are creating a separate legal entity with its own filing, registration, and compliance obligations, and operational needs. The 501(c)(3) should carefully assess whether it has access to the additional capacity necessary to create and run a separate entity.
  • Funding – While 501(c)(4)s are exempt from federal income taxes, donations to them are typically not deductible for donors. Accordingly, finding funding for a 501(c)(4)’s activities can be challenging.  Before beginning the process of forming an affiliated 501(c)(4), it would be wise for a 501(c)(3) to ensure that the 501(c)(4) will be able to attract sufficient funding to set it up for success, and that the pursuit of such funding will not negatively impact the 501(c)(3)’s ability to fundraise from common donors.
  • Affiliation Structure – Because nonprofits do not have any owners, it is not possible to a create a 501(c)(4) “subsidiary” of a 501(c)(3). However, if close affiliation between the two organizations is desired, there are a few options for structuring such affiliation.  These structures are usually created in the 501(c)(4)’s Bylaws, which will be subject to the laws of the state in which the entity was incorporated.  In California, one option may be to create a voting membership structure with the 501(c)(3) as the sole voting member of the 501(c)(4).  Alternatively, the 501(c)(3) could be given the right to designate some or all of the Directors of the 501(c)(4).  However, in setting up such an affiliation, the 501(c)(3) will need to be mindful of the need to maintain appropriate separation between the entities, for the purposes of both ascending liabilities and to ensure it does not jeopardize its own tax-exempt status.
  • Exemption/Registration – Another distinction between 501(c)(4) and most 501(c)(3) organizations is that 501(c)(4)s may self-declare as exempt from federal income taxes without needing to file an application with the IRS. Many 501(c)(4)s nonetheless choose to file a Form 1024 and obtain recognition of tax-exemption in order to have the assurance that comes with such recognition.  In addition, as of mid-2016, organizations intended to operate as exempt under Section 501(c)(4) must file IRS Form 8976 with the IRS no later than 60 days after the organization is formed (see our earlier blog post on this requirement here).
  • Maintain Appropriate Separation – Because 501(c)(4)s can engage in activities that 501(c)(3)s may not, it is important that appropriate separation between two such affiliated organization be maintained and that the 501(c)(3) not allow its assets to be used to subsidize the activities of the 501(c)(4) that are prohibited for the 501(c)(3). For example, if the 501(c)(3) wishes to make a grant to an affiliated 501(c)(4), it should be made pursuant to a written grant agreement that clearly requires the funds to be used solely for 501(c)(3)-consistent purposes.  Accordingly, a general operating grant from a 501(c)(3) to a 501(c)(4) would not be permissible, even for startup costs, as such a grant could serve to further activities not permissible for the 501(c)(3).  A grant made for the stated purpose of supporting the 501(c)(4)’s lobbying activities must be accounted for as a lobbying activity and/or expenditure of the 501(c)(3), and a grant that does prohibit its use for lobbying may also be attributed as a lobbying expenditure by the 501(c)(3).  If the two entities will share resources, such as staff or facilities, such sharing should be pursuant to a resource sharing agreement that ensures that the 501(c)(4) pays at least its fair share for the costs of the day-to-day operations of the 501(c)(4).
  • Political/Election Laws – Finally, if a 501(c)(4) does engage in lobbying or election-related work, it may be subject to additional election and political laws beyond the tax laws generally discussed in this post. A 501(c)(4) will need to be aware of any such applicable laws in advance of engaging in lobbying or election-related activities in order to ensure compliance.  Note that a 501(c)(3) may also be subject to some political and election laws if it engages in certain activities, particularly permissible nonpartisan election-related activities.

In summary, in many instances, creating an affiliated 501(c)(4) can be a highly effective means of furthering an organization’s mission.  However, it is important to think through the various considerations in advance to ensure that such an affiliation is proper under the particular circumstances, and will be set up for success.

New Frontiers: 2016 Independent Sector Annual Conference

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Washington DC is the site for New Frontiers, the 2016 Independent Sector Annual Conference and Public Policy Action Institute, taking place  November 15-18. The Conference comes at a pivotal time for the nonprofit sector and our nation, rigidly divided on so many issues and characterized in many ways by a disengaged and disenchanted citizenry. The opening reception will be held at the Smithsonian’s brand new National Museum of African American History and Culture.

The Independent Sector Conference is the meeting ground for leaders and changemakers looking to drive momentum for the charitable community, set the sector’s agenda for the coming year, and collaborate on strategies for success.

 

We’ll take our messages to Capitol Hill, learn from insiders about how we can connect with the new administration, and collaborate to revitalize the ideals of democratic engagement in service of the common good.

Public Policy Action Institute (pre-conference)

Whether you’re a policy novice or an expert, the Public Policy Action Institute gives charitable sector leaders, policy advocates, and communications specialists effective strategies for getting your mission and message front and center with policymakers. And new this year, we’ll take our messages directly to the Capitol for Independent Sector Hill Day. You’ll meet face-to-face with policymakers about the issues most important to your work.

Making our Voices Heard in an Election Year and Beyond

  • “America is great because America is good, and if America ever ceases to be good, America will cease to be great.” – Alexis de Tocqueville
  • “The independent sector is our best line of defense for vulnerable populations. … Advocacy is not a luxury; it’s essential.” – Tom Sheridan
  • America doesn’t believe government is working for them but overwhelmingly believe in the nonprofit sector. See The Power of Nonprofit Advocacy: Best Lobbying Resource
  • 85% of young voters believe fed gov’t should be doing more to engage charitable sector to help address economic & social challenges. United For Charity (p. 8)
  • Report Shows Foundation Funding of #Advocacy Produces a Return on Investment of $115 to $1. NCRP
  • We don’t change without some level of disruption and revolution. Allow and don’t suppress millennial activism. Focus on engagement and empowerment of millennials.
  • To leverage engagement with elected officials, some charities (like Save the Children) have formed an affiliated 501(c)(4) organization that can lobby without limitation and endorse and/or oppose political candidates. The 501(c)(4) allows you to “thank and spank;” it’s the hammer to hold elected officials accountable.
  • Use the arts to further your message and engagement with elected officials.
  • Data is important (particularly for federal grants – see the Commission on Evidenced-Based Policy Making) but it’s expensive, can be skewed, and campaigns have been shown to win without good data. Sheridan advised organizations to “spend just enough on data to get you where you need to go.” He added that organizations should do (1) message-focused research to ensure they are avoiding the common trap of simply preaching to the choir and (2) impact-focused research to ensure they are satisfying donors and funders. Of course, impact-related data is important to inform nonprofits and their boards about their activities and decision-making.

Positioning our Tax Policy Soapbox for 2017

Continuing the Public Policy Legacy of John Gardner

  • “We can’t write off the danger of complacency, growing rigidity, imprisonment by our own comfortable habits and opinions.” – John Gardner, Personal Renewal
  • “You have within you more resources of energy than have ever been tapped, more talent than has ever been exploited, more strength than has ever been tested, more to give than you have ever given.” – Gardner – appropriate on an organizational and national level too

Sway the Other Branches of Government

Effectively Communicating with Congress: How to Develop and Implement an Effective Communications and Advocacy Strategy

  • Consider allies and opponents resulting from your advocacy and how that may play out in the future
  • Review levels of engagement mapped against audiences – see Evaluating Public Policy Advocacy (Framework for Policy & Advocacy Outcomes)
  • Communications: modern storytelling with peer voices (e.g., Humans of New York); humor; real-time; value-based; best practices (curating content, inviting others to conversation)
  • Jab-jab-jab-right hook – only every fourth piece should be an “ask”
  • “If you’re not at the table, you’re on the menu.” Keep messaging (use social media but don’t let it be stagnant).
  • “We in America do not have government by the majority. We have government by the majority who participate.” – Thomas Jefferson
  • Congressional offices are using social media to help gauge public opinion but district services still #1
  • How many similar comments on a social media post would be enough for your office to pay attention to? 80% of Congressional staff say less than 30. But you have to respond to them in 24-48 hours tops.

2020 Census

  • Census is connected to when redistricting [gerrymandering] gets done.
  • Policy decisions will matter. Immigration status could be added, which would result in significant reporting issues with many in fear of sharing information with the government.
  • Get-out-the-count will matter. Note that in the 2010 Census over 10% of Blacks and Latinos were missed in certain urban areas because of undercounting, particularly of children under 5.
  • Check out Annie B. Casey Foundation’s Kids Count Data Center

New Frontiers – Independent Sector Annual Conference

The Great Shared Task (Opening Plenary)

Christylez Bacon, Grammy-nominated hip hop music artist, opened the plenary with It’s the Beatbox. Immediately after, a panel reacted to the recent Presidential election.

  • Media may be the most effective check against the President; the First Amendment is first for a reason.
  • How do we discuss race and sexism in ways that aren’t so divisive? How can we listen to racists without getting angry at them? We should be angry.
  • Americans have deliberately chosen to blow up the system and elect a leadership in which anything is possible. But power is not permanent. – Michael Steel
  • Charitable organizations provide a voice for marginalized groups. The sector has a collective responsibility to influence policymakers.
  • Must work like hell to make sure we make good decisions on the state level. – Ellen Alberding
  • Private foundations should be much more aggressive on the advocacy front on the issues they care about. Many private foundations do not take the opportunity to fund advocacy.
  • What people care about are big issues, not your institution. Charities of all sizes and types must have a policy strategy, lock arms, and go after the big issues (including tax policy). – Brian Gallagher
  • Anti-establishment sentiment has already colored how people think about foundations and charities. – Gallagher

Live From IS: Where Nonprofits Fit After ‘Primal Scream’ – The NonProfit Times

Frame-Breaking Ideas for 21st Century Fundraising

  • Jeanne Bell (CompassPoint) shared with the audience the following publications:
    • Underdeveloped – nonprofits struggling with high turnover & long vacancies in development director post – results in vicious cycle –
    • Fundraising Bright Spots – 1. Fundraising is core to the organization’s identity; 2. Fundraising is distributed broadly across staff, board, and volunteers; 3. Fundraising succeeds because of authentic relationships with donors built on strong, trusting relationships among staff, board, and volunteers; 4. Fundraising is characterized by a systematic approach to donor engagement and continuous improvement
  • Discussion Issue: What is most challenging about engaging the broader staff in fundraising at your organization? Groups quickly moved to looking at solutions, including focusing on understanding charitable motivations of staff and framing it also as leadership training.
  • Anne Wallested (BoardSource) noted our unhealthy obsession with cost of fundraising and introduced a new way of measuring fundraising effectiveness with a preliminary draft paper:

1. Are we raising enough money to fund our mission now and in the future? (Total Fundraising Net)

2. To what extent are we dependent on a small number of large-scale donations? (Dependency Quotient = sum of contributions from top five donors or funders/total expenditures)

3. How efficiently are we raising funds? (Cost of Fundraising = total fundraising expenses/total fundraising net)

Equation: Enough money to fund programs + A responsible balance of risk and reward = Healthy fundraising programs

Communications: Talk impact, not percentages; focus on overall results, not individual tactics; be transparent, but holistic

  • Ann Hale (AFP) discussed competencies of fundraisers – relationship building, leadership, professional judgment, and organizational management.

Opening Reception (National Museum of African American History and Culture – Smithsonian)

The reception allowed us to visit the National Museum of African American History and Culture and it was a powerful, moving experience.

Community Town Hall (Plenary)

The Duke Ellington School of the Arts Show Choir opened the plenary with Hit Me With a Hot Note.

  • We were introduced to Independent Sector President and CEO Dan Cardinali (bio).
  • Dan learned from Native Americans in Philanthropy CEO Sarah Eagle Heart that “New Frontiers” meant something other than intended to some people, which left him feeling embarrassed but also hopeful that we could openly have this discussion at a meeting with newcomers to the Conference.
  • “We as a community care about the means as much as the ends.” – Cardinali
  • Through relationships, toxic stress diminishes in the body and the community. Nonprofit sector has the treasure of public trust and the public confidence in having expertise. Nonprofit sector is trusted to heal the country. – Cardinali

Community Dialogues

  • What are the three unique assets the sector has that are critical to healing the nation?
  • What are the commitments of the nonprofit sector?
  • What are the commitments we should expect of government?

Philanthropy Making a Difference with Government

  • Bad systems trump good programs – this is why philanthropy must partner with government
  • Philanthropy allows government to be more nimble, take risks, and create change
  • Lessons learned from collaborations: (1) role confusion and conflation; (2) defined responsibilities; (3) resources – whose; (4) results – shared definition; (5) risk – allocation (and who is going to move first). Add readiness (agencies may have many barriers to saying “yes” to anything but some barriers may be historical and not true legal barriers).
  • Foundations should invest heavily in having the community’s voices heard. One type of investment is higher risk tolerance.
  • Lean in, don’t step back in collaborating with government now. Mechanisms may be different, your missions are the same.

Dog Whistle Politics: How Racism Wrecks the Middle Class

  • “Strategic racism helps win elections…and not just this one.” Ian Haney Lopez
  • Call to Action: “This is the best opportunity in a generation to convince people that racism is a divide and conquer weapon that hurts all of us.”
  • “To restore our country–we need an inclusion revolution.” – Lopez. We must organize around identity, not class.

Keeping Up With Forces Shaping Our Future

  • Futurists look for trends and signs of change across the “STEEP” categories: social, technological, environmental, ecological, and political.
  • A futurist can help shape plans – see Perez Art Museum’s plans for surviving a hurricane.
  • Changing future of work – jobs are rapidly changing, millennials change jobs every 2 years or less (is this a symptom of a big problem?), rise of the “gig” economy, fight for $15 hour minimum wage, technology (e.g., artificial intelligence, diverless cars) automating work.
  • Pace of change is so rapid, it may require multiple pivots in organizational direction and structure.
  • Scenario planning is a structured way for organisations to think about the future.. The Economist

America Divided: How Can Our Sector Work Together Better? (Screening)

This series cuts to the heart of the inequality crisis, exploring life-and-death struggles around the economic, social and political divide. Our aim is to expose the damage extreme inequality inflicts on all Americans, reveal its systemic causes, and celebrate real-world heroes fighting for solutions.

The creator and executive producer of America DividedSolly Granatstein, provided us with a glimpse at some of our problems with inequality, including through subtle (to the prospective tenant) but pervasive housing discrimination.

On Shifting Ground – A Production of the Hilton Prize Coalition (Screening)

Steve Connors, Master Storyteller and Director, Hilton Prize Coalition Storytelling Program, noted the challenges of collaboration among local NGOs after the devastating 2015 earthquake in Nepal. They simply didn’t know each other.

With the production of “On Shifting Ground” as the Storytelling Program pilot, The Hilton Prize Coalition has created a new model for collaboration to achieve collective impact. With tools and support from the Coalition, the organizations featured are now formalizing a collaborative framework around program delivery that arose organically from their participation in the film.

Leadership Awards Luncheon

The Luncheon celebrated the transformative leadership of Bryan Stevenson, recipient of the 2016 John W. Gardner Leadership Award, and Diana Nambatya Nsubuga, recipient of the 2016 American Express NGen Leadership Award. Stevenson’s powerful messages inspired and resonated with the attendees:

  • “I don’t believe slavery ended in 1865, it just evolved.”
  • Whenever you allow yourself to be governed by fear and anger, you will tolerate inequality and oppression.
  • “If we do the uncomfortable things, we’ll find something on the other side of that.” We don’t create change when we only do what’s convenient and comfortable. Progress is never comfortable.
  • We need to change the narrative and be willing to talk about things we’ve been afraid to talk about.
  • You are beating the drum for justice. “We’ve got to be brave, brave, brave.”
  • Hopelessness is the enemy of justice. Hope will get you to speak, stand when others try to hold you down.
  • There is power in proximity. Too often we are trying to help suffering people from afar.
  • Beware of any romanticization of civil rights activism; it’s nothing like a “3-day carnival”.

Some final words from the Conference:

  • “America faces breathtaking opportunities disguised as unsolvable problems.” – Gardner
  • Make a career of humanity. Commit yourself to the noble struggle for equal rights.

The Power of Nonprofit Advocacy: Best Lobbying Resource Ever!

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From Independent Sector –

Voter polling commissioned by Independent Sector has found that, across the political spectrum, American voters are overwhelmingly united in support of the charitable sector. The findings are summarized in a new report, “United for Charity.”

 

As the report title suggests, voters show a high degree of trust and value in the charitable community. In particular, voters show exceptionally strong bipartisan support for expanded incentives for charitable giving and increased collaboration between government and the charitable sector. For more info and the full report, visit independentsector.org/polling.

 

We invite you to use #United4Charity to join the conversation about these new findings on social media.

Highlights –

  • A strong majority of voters (78 percent) support a bigger role for the charitable sector in working with the federal government to produce more effective and efficient solutions to problems.
  • 70 percent of voters are more likely to vote for a candidate who supports policies that help the charitable sector become more involved in government policy making.
  • About 88 percent believe we should make it easier for people to deduct charitable contributions from their taxes.
  • An overwhelming majority (85 percent) believe charitable groups and nonprofits should operate under the same set of rules and regulations as everyone else in the policymaking space.
  • About 74 percent trust charities with their checkbooks over the federal government and want to see expanded access to charitable giving.

Tip –

Share this powerful 1-page infographic with your policymakers whenever lobbying on a bill, advocating for policy change, or otherwise seeking their attention. Help them understand the charitable sector, its influence, and its (often untapped) power.

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501(c)(3) Electioneering Rules: Voter Guides & Candidate Questionnaires

 

Closeup of businessman making decision whether to accept or deny a suggestion or employee.

 

In this next post in our series on election-related activities and 501(c)(3) organizations, we are taking a closer look at nonpartisan voter guides and candidate questionnaires.  Despite the fact that such guides and questionnaires are election-related, 501(c)(3) organizations can prepare and distribute them without fear of jeopardizing their exempt status (if done properly!).

A voter guide or candidate questionnaire is typically a printed guide comparing the positions of candidates for a particular office.  The information used to compile a voter guide is often gathered from questionnaires sent to the candidates soliciting their responses and from public sources, such as campaign materials and incumbent legislative records.  While other types of entities may be able to prepare voter guides that instruct the recipient who to vote for, 501(c)(3) organizations may not prepare such guides for the purpose of influencing the outcome of an election or benefitting a particular candidate or political party.  Rather, it would be appropriate for a 501(c)(3) organization to distribute a voter guide merely for impartial educational purposes.

The IRS has indicated that, in determining whether the preparation and distribution of a voter guide constitutes impermissible campaign intervention, the following factors are key considerations:

  • “Whether the questions and any other description of the issues are clear and unbiased in both their structure and content.”
  • “Whether the questions posed provided to the candidates are identical to those included in the voter guide.”
  • “Whether the candidates are given a reasonable amount of time to respond to the questions.  If the candidate is given limited choices for an answer to a question (e.g. yes/no, support/oppose), whether the candidate is also given a reasonable opportunity to explain his position in his own words and that explanation is included in the voter guide.”
  • “Whether the answers in the voter guide are those provided by the candidates in response to the questions, including whether the candidate’s answers are unedited, and whether they appear in close proximity to the question to which they respond.”
  • “Whether all candidates for a particular office are covered.”
  • “Whether the number of questions, and the subjects covered, are sufficient to encompass most major issues of interest to the entire electorate.”

As with other election-related activities, the IRS will look at all of the facts and circumstances in reviewing a voter guide prepared by a 501(c)(3) organization.  This includes the guide’s format, its content, and the method of distribution used.  In designing a questionnaire to send to candidates, 501(c)(3) organizations must be careful to draft neutral questions—ones that do not hint at the “correct” answer or indicate the organization’s position on the issue being discussed.  They should also avoid separately stating the organization’s position on any of the issues covered in the guide, which would likely be viewed by the IRS as an invitation for recipients to compare the views of candidates to those of the organization.

Also, as with other election-related activities (and activities in general), a 501(c)(3) organization is not able to do indirectly what it would be prohibited from doing directly.  Accordingly, the distribution by a 501(c)(3) organization of a voter guide prepared by a third party that it could not have prepared itself will likely constitute impermissible political campaign intervention.

501(c)(3) Electioneering Rules: Candidate Appearances & Debates

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While 501(c)(3) organizations are prohibited from intervening in elections, they are permitted to engage in certain nonpartisan election-related activities if they structure such activities appropriately, which we’ll address in this next post in the series.  This includes sponsoring candidate debates and forums and inviting candidates to speak at organizational events.  However, 501(c)(3) organizations must be careful when hosting such events that they do not serve to favor or oppose any particular candidate or political party.

Fortunately, the IRS has provided some guidance in Revenue Ruling 2007-41 regarding how 501(c)(3) organizations may arrange for candidate appearances without jeopardizing their exempt status.  However, keep in mind that whether such events ultimately constitute impermissible campaign intervention will depend on all of the facts and circumstances, including:

  • “Whether the organization provides an equal opportunity to participate to political candidates seeking the same office;”
  • “Whether the organization indicates any support for or opposition to the candidate (including candidate introductions and communications concerning the candidate’s attendance);” and
  • “Whether any political fundraising occurs.”

If a 501(c)(3) organization hosts candidates for a political office at separate events, whether those candidates were given an equal opportunity to participate will depend on the comparative nature of the events.  For example, it would likely constitute impermissible campaign intervention for an organization to invite one candidate for a particular office to speak at its highly-publicized and well-attended annual gala while inviting her opponent to speak at an unpublicized and sparsely attended meeting.  Even if the organization presented each candidate in a neutral way, the disparate nature of the events would likely be viewed as expressing a preference for, and providing a benefit to, a particular candidate.

In Revenue Ruling 2007-41, the IRS also provided guidance on when a 501(c)(3) organization may be able to host a candidate debate or forum for the purpose of educating the public without running afoul of Section 501(c)(3).  The facts and circumstances the IRS has identified as relevant to determining whether a forum or debate involving candidates constitutes political campaign intervention include:

  • “Whether questions for the candidates are prepared and presented by an independent nonpartisan panel,”
  • “Whether the topics discussed by the candidates cover a broad range of issues that the candidates would address if elected to the office sought and are of interest to the public,”
  • “Whether each candidate is given an equal opportunity to present his or her view on each of the issues discussed,”
  • “Whether the candidates are asked to agree or disagree with positions, agendas, platforms or statements of the organization,” and
  • “Whether a moderator comments on the questions or otherwise implies approval or disapproval of the candidates.”

In addition, the organization should be careful to publicize any such event broadly and to avoid intentionally filling the audience with individuals that favor or oppose a particular participating candidate.  It should also select a neutral moderator who is aware of the campaign intervention prohibition and who will be able to treat the candidates fairly.  Finally, the organization should announce a disclaimer at the event that the views shared by the candidates are not those of the host organization and should avoid any post-event publications that contain ratings or evaluations of the candidates’ performances.

For more information, see Alliance for Justice’s advocacy resource, Rules of the Game: A Guide to Election-Related Activities for 501(c)(3) Organizations.

Employee Endorsements & Election Activities

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As we’ve previously written in the first post of this series, 501(c)(3) organizations are prohibited from engaging in or sponsoring activities that intervene in a political campaign for public office.  However, this does not mean that all individuals associated with such organizations, including employees, volunteers, officers, and directors, are similarly prohibited from engaging in electioneering activities.  Individuals do not give up their First Amendment rights simply by associating with a 501(c)(3) organization, and organizations should be careful to avoid placing unnecessary (or impermissible) restrictions on such individuals’ activities.

Rather, a 501(c)(3) organization should adopt carefully-thought-out written policies regarding the use of the organization’s name, its resources, and staff time in connection with individuals’ personal activities.   First and foremost, a 501(c)(3) organization should put into place practices to ensure that none of its assets or facilities are used in connection with an individual’s electioneering activities.  This includes not only the organization’s funds, but also its telephones, computers, email accounts, letterhead, mailing lists, and copy machines, as well as other resources.  The organization should also generally ensure that any compensated staff member does not use time on the job for such activities and should avoid using organizational events or other platforms for announcing individuals’ electioneering activities.

A 501(c)(3) organization may also wish to use disclaimers itself and to encourage associated individuals to do so, as well.  For example, when engaging in permissible nonpartisan election-related activities, the organization should consider including written disclaimers in any materials and oral disclaimers at any event stating that the organization itself cannot and does not endorse or oppose candidates for elective office.  Individuals associated with 501(c)(3) organizations should be requested to include disclaimers making clear that statements they make in their individual capacities in support of or in opposition to candidates for elective office are their own and do not reflect statements made on behalf of the organization.  And if the individual’s affiliation with the organization is included as part of any electioneering statement by that individual, it should be made clear that it is for identification purposes only and is not intended to reflect action on behalf of the organization.

Keep in mind that a 501(c)(3) organization cannot do something indirectly through its employees or volunteers that it could not do directly itself.  It also may not send internal messages or communications to its employees or volunteers, such as alerts as to which candidates are best aligned with the organization’s mission and should therefore be voted for, that it could not send more broadly.

For more information, see Alliance for Justice’s advocacy resource, Rules of the Game: A Guide to Election-Related Activities for 501(c)(3) Organizations.

Nonprofit Radio: Election Year Advocacy

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I’ll be on Nonprofit Radio this Friday at 10:30 am PT / 1:30 pm ET discussing What’s Permissible Advocacy with host Tony Martignetti. Catch us live on Talking Alternative or a few days later on iTunes.

How much can your nonprofit participate in the presidential election? Can you educate? Endorse? Lobby? Gene Takagi walks us through what’s allowed; disallowed; and questionable.

Who Should Engage in Advocacy?

All of us who work for nonprofits are advocates of our organizations and the communities they serve. Fundraisers know this. But the role of advocacy needs to be further embedded on all levels of a nonprofit starting with the board. We should also ensure we’re communicating not only with prospective donors but also with the broader public. And we can’t forget about policy makers who create the rules and the playing field we operate in. Let’s remember that all of the most important public policies we hold dear to us – civil rights, women’s rights, disability rights, education, health, religion, environmental protection, animal welfare, etc. – result from strong nonprofit advocacy and not just individual leaders.

Potential Areas of Advocacy

  • Proposed cut in budget or public services to the people you serve
  • Proposed change in a law that will affect your core mission and the people you serve
  • Proposed change in law that will affect your organization’s ability to operate or fundraise

Some Permissible Forms of Advocacy for Public Charities

  • Stating the organization’s position on a public policy issue
  • Educational activities (including educating lawmakers and even candidates if done appropriately in a nonpartisan manner)
  • Lobbying (attempting to influence legislation – bills and laws made by legislative bodies), within certain limits which can be fairly generous, particularly for charities making the 501(h) election
  • Advocating a change in administrative regulations

Some Impermissible Forms of Advocacy for Public Charities

  • Endorsing a candidate for public office (including by providing a link to a candidate’s website)
  • Contributing to a candidate
  • Using organizational resources to support a candidate (including use of organizational emails)
  • Getting a candidate to endorse the organization’s agenda
  • Evaluating or grading the candidates’ positions

Some Tricky Areas to Approach Cautiously

  • Issue advocacy (generally okay) that may appear to be timed with an election
  • Legislative scorecards that may appear to be timed with an election
  • Praising, honoring, criticizing an incumbent who is also a candidate
  • Voter education (debates, forums, guides, candidate questionnaires) implemented in what may appear to be a partisan manner
  • Social media likes, favorites, follows, and third party comments related to candidates

Resources

Everyday Advocacy, National Council of Nonprofits

Policy & Advocacy, Independent Sector

The Do’s and Don’ts of Electoral Advocacy, NAEYC

Electoral Activity, Bolder Advocacy (Alliance for Justice)

 

 

The Electioneering Prohibition: A Closer Look

A night shot of the eastern facade and dome of the US Capitol in Washington, DC.

With the election year in full swing, many nonprofits have questions regarding the scope of permissible election-related and lobbying or advocacy activities organizations recognized as exempt under Internal Revenue Code Section 501(c)(3) can engage in.  This post will be the first in a series discussing these issues.

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As most 501(c)(3) organizations are well aware, they are prohibited from engaging in any electioneering activities.  This prohibition comes from the language of Section 501(c)(3) itself, which describes an organization exempt under that Section as one that “does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.”  The general idea is that an organization is not operated exclusively for one or more exempt purposes within the meaning of Section 501(c)(3) if it engages in activities intended to impact the outcome of an election.  But what does this language really mean in practice?

In simple terms, a 501(c)(3) organization may not directly or indirectly engage in or sponsor any activity that supports or opposes any candidate for public office.  A “candidate” for purposes of this prohibition includes “an individual who offers himself [or herself], or is proposed by others, as a contestant for an elective public office…”.  The prohibition applies not only to declared candidates, but also to third-party movements and efforts to encourage or discourage someone from running for office.  “Public office” for these purposes refers to any position that is filled by a vote of the people.  This includes elected offices at the local, state, and federal level, as well as party nominations, and is not limited only to partisan positions.  However, it does not extend to appointed public official positions, such as some judges and executive nominees (although note that activities related to such appointments may constitute lobbying if the appointments are subject to legislative confirmation).

The prohibition on election intervention includes publishing or distributing written statements or making oral statements on behalf of or in opposition to a candidate, including on social media.  It also includes using any of the organization’s resources to support or oppose a candidate, such as by making a contribution to a campaign, preparing a research report for the use of only one campaign or certain campaigns, or sharing the organization’s mailing list with a specific campaign for free.  However, it generally also includes less obvious activities, such as coordinating activities with a campaign, distributing campaign materials at an organizational event, or using code words in a communication to refer to a candidate other than by name.

In determining whether a particular action constitutes impermissible electioneering, the IRS will look at the all of the relevant facts and circumstances.  While there is no clearly established test that will be used, the IRS has indicated that the factors it may consider in determining whether a particular communication constitutes prohibited electioneering include:

  • Whether it identifies a candidate for public office or a candidate’s position on an issue that is the subject of the communication
  • Whether it expresses approval or disapproval for a candidate’s position or actions
  • The timing of the message and its proximity to an election
  • Whether it makes reference to an election or voting
  • The targeted audience, including whether it targets voters in an election
  • How the message relates to candidates’ and political parties’ communications, and whether it discusses an issue that has been raised as distinguishing candidates for a given office
  • Whether it is part of an ongoing series of communications by the organization on the same issue that are made independent of the timing of any election
  • Whether the timing of the communication and identification of a candidate are related to a specified event other than an election (such as a scheduled vote on legislation)

If a 501(c)(3) organization engages in any amount of prohibited electioneering, it runs the risk of having its tax-exempt status revoked by the IRS, either permanently or for a specified period during which the activities occurred.  The IRS also has the authority to impose a tax of 10 percent of the expenditure associated with the electioneering activities on the organization and a tax of 2.5 percent on organizational managers who knowingly and willfully approved a prohibited expenditure, up to a total of $5,000.  If the IRS does impose either tax and the expenditure is not corrected within the appropriate period, an additional tax of 100 percent of the prohibited expenditure may be imposed on the organization and an additional tax of 50 percent may be imposed on the individual managers, up to a total of $10,000.

Although 501(c)(3) organizations must be careful to avoid engaging in prohibited campaign intervention, not all election-related activities are completely prohibited for such organizations.  We will discuss certain permitted nonpartisan election-related activities that can be engaged in (if done carefully) without jeopardizing an organization’s exempt-status in additional blog posts in this series.

* Please note that the posts in this series are intended to address some of the federal tax law issues that may apply to organizations recognized as exempt under Internal Revenue Code Section 501(c)(3).  However, they do not address other potentially applicable legal, registration, or reporting requirements, including, but not limited to, state tax law issues, federal election law, or state and local election laws, which are currently beyond the scope of this blog.  Organizations should be aware of all applicable laws, rules, and requirements and ensure appropriate compliance.

Lobbying & Grants to Non-501(c)(3) Entities: Know The Rules

Investment

Although many people think otherwise, 501(c)(3) public charities are in fact permitted to engage to lobbying activities, provided such activities are an insubstantial amount of their overall activities. They are also generally permitted to fund any work of other entities, including non-public charities, that they could engage in themselves, including lobbying activities.  However, when a public charity makes grants to an entity that is not another 501(c)(3) public charity (such as a taxable entity or an individual), there are specific rules regarding how lobbying expenditures and activities of the non-public charity grantee are attributed to the grantor organization.  These types of grants may be particularly common for public charities engaging in preapproved grant relationship fiscal sponsorship or for community foundations.

These specific rules are set forth in a Treasury Regulation that essentially states that, in such a situation (which is distinguished from when the same grantor is making grants to other public charities), a grant to a non-public charity that engages in lobbying activities will be treated as a lobbying expenditure or as lobbying activity for the grantor and will count against the grantor’s lobbying limits.

For example, if a public charity were to make total grants in a given year of $50,000 to a non-public charity grantee and that grantee itself spent $25,000 on lobbying activities during the year, the public charity would have to count $25,000 of its grant as its own lobbying expenditure or activity for the year, even if the funds the grantee actually used to lobby were funds other than those granted by the public charity.

Moreover, when a public charity has made the election under Section 501(h) (which we recommend that most public charities do), its lobbying activities are divided into direct lobbying (generally a lobbying communication with a legislator or staff member or with members of the public where the public is the decision maker, like with ballot measures) and grassroots lobbying (a communication with the general public that refers to specific legislation, reflects a view on that legislation, and contains a call to action) activities.  A 501(h)-electing organization may spend no more than 25% of its maximum total lobbying expenditure limit (based on its total exempt purpose expenditures) on grassroots lobbying.

Under the Regulation, where the grantmaking public charity has made the Section 501(h) election, the lobbying expenditures made by the grantee will be presumed to be grassroots lobbying expenditures. These amounts will be counted towards the grantor’s lower grassroots lobbying limit unless the amount of the grant exceeded the grantee’s actual grassroots lobbying expenditures, in which case any excess may be attributed to direct lobbying expenditures up to the extent of the grantee’s actual direct lobbying expenditures.  If the amount of the grant from the public charity to a grantee exceeds the grantee’s grassroots and direct lobbying expenditures combined, then the excess amount of the grant will not be treated as a lobbying expenditure for the public charity.

Using the example above, if the grantee’s $25,000 in lobbying expenditures was comprised of $20,000 in grassroots lobbying and $5,000 in direct lobbying, that would be how the grantmaking public charity would attribute it for purposes of its own expenditures.  If, however, the grantee had actually spent $60,000 on lobbying during the year and $55,000 of it was on grassroots lobbying, then the full amount of the $50,000 grant would count towards the public charity’s own grassroots lobbying limit.

Because of these attribution rules, it will be important for any 501(c)(3) public charity making grants to non-public charity entities or individuals who engage in lobbying activities to have a clear understanding of its own lobbying limits, as well as a process for grantees to track and report their grassroots lobbying, direct lobbying, and total lobbying activities and expenditures.

There is, however, an exception to the attribution rule set forth in the Regulation for “controlled grants”, which are grants as to which “the donor limits the grant to a specific project of the recipient that is in furtherance of the donor’s (nonlobbying) exempt purposes; and … maintains records to establish that the grant is used in furtherance of the donor’s (nonlobbying) exempt purposes.”  If the public charity grantor makes a controlled grant following this definition, then the lobbying conducted by the grantee will not be attributed to the grantor for purposes of its limits. Accordingly, it may be advisable for most grants from 501(c)(3) public charities to non-public charities to be structured as controlled grants unless the grantmaking organization intends for such grant to in fact be used for lobbying activities.

Highlights from CalNonprofits Annual Policy Convention 2015

your vote matters phrase handwritten on blackboard with heart symbol instead of O

Our team had the pleasure of attending the CalNonprofits Annual Policy Convention in Oakland yesterday. It was a nonprofit conference full of practical substance with a strong emphasis on attendees actively engaging their stakeholders and getting them to vote.

Keynote

The morning keynote address by Dr. Raphael Sonenshein was outstanding. He noted that anger and fear motivated people to vote more than hope. And currently, white people without college degrees are angry, alienated, and attracted to Donald Trump. They vote because they feel their lives depend on it.

On the other hand, voters characterized by hopefulness more than anger, are less likely to vote unless deeply engaged. They turned out in big numbers to elect President Obama, who ran a campaign on hope and change, but largely failed to vote at the last election.

Because lawmakers act with little concern for groups of people who are not voting, and sadly, these groups include many people served by nonprofits, nonprofits need to engage and mobilize them. Part of the challenge is that such individuals, including many minorities, feel disengaged because they are underrepresented and unfamiliar with the electoral process. Moreover, institutional barriers prevent their participation. Such barriers include voter registration requirements, language barriers, and lack of voter education and outreach. Sonenshein identified voter suppression as the civil rights issue of our time.

Despite Trump’s current polling numbers, Sonenshein predicted Speaker Paul Ryan would eventually be pegged the Republican candidate at a brokered convention.

Rules to Know

Rosemary Fei (Adler & Colvin), Elizabeth Bluestein (Public Counsel), and I presented a session on 10 17 Rules Your Nonprofit Needs to Know For 2016. You can download our resource list here. Here is a list of topics we covered, Pardon the Interruption-style (3 minutes for each topic):

  1. Minimum wage
  2. Lobbying and ballot measures
  3. Local lobbying ordinances (including San Francisco’s Prop C that passed the night before)
  4. Electioneering/voter education/voter registration/get-out-the-vote drives
  5. Status of IRS proposed regulations for 501(c)(4)s and political activities
  6. Affiliations among exempt organizations (e.g., 501(c)(3) and 501(c)(4))
  7. New entity forms (like the benefit corporation)
  8. New private foundation rules (mission-related investments, foreign public charity equivalents, PRIs)
  9. Crowdfunding
  10. Raffles
  11. Commercial fundraisers
  12. Overhead in grants/contracts – federal circular, private foundation funding
  13. IRS Form 1023-EZ
  14. Payments in lieu of taxes (PILOTs)
  15. Attorney General Annual Registration Renewal disclosures for fiscal sponsors and others
  16. New Attorney General regulations on operating while suspended and new laws on administrative dissolutions of nonprofit corporations
  17. Required donor list disclosures to the Attorney General

Advocacy Agenda

During lunch, CalNonprofits CEO Jan Masaoka presented An Advocacy Agenda for California’s Nonprofit Community and a Report on CalNonprofits’ Work. She cited some surprising statistics about California’s nonprofit sector detailed in CalNonprofits’ Causes Count report (a highly recommended read). I knew the nonprofit sector was the most trusted of the three sectors (the others being the for-profit sector and government). But I did not know that the nonprofit sector was also viewed as the sector that operates most effectively and most efficiently. Masaoka identified the nearly 1 million employees and 7 million volunteers of California nonprofits as a voting bloc. The key and a principal goal of CalNonprofits is to engage them to actively and consistently vote.

More on the Convention

Afternoon breakout sessions included a Town Hall Meeting on Nonprofit Overhead and An Economic Forecast for the California Nonprofit Sector. The day closed with Q & A with the Democratic and Republican Leaders of California featuring Cynthia Bryant, Executive Director, California Republican Party and Shawnda Westly, Senior Strategist, California Democratic Party. Post-convention workshops today include Using Social Media to Raise Money; Real Costs – Realistic Strategies: Understanding, Communicating, and Funding the Full Cost of Your Services; Nonprofit Insurance Boot Camp; and OMB Uniform Guidance: Evaluating Options to Recover Your Full Costs.