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The Connection: Strategies for Creating and Operating 501(c)(3)s, 501(c)(4)s, and PACs
The updated guide The Connection: Strategies for Creating and Operating 501(c)(3)s, 501(c)(4)s, and Political Organizations from the Alliance for Justice sets out the legal lay of the land for nonprofits seeking to expand their advocacy activities. It covers different kinds of tax-exempt organizations, detailing what advocacy activities each can do and how they can be affiliated under rules in federal tax and election statutes. This article briefly summarizes the topics in the book. It is available to purchase for $35 from Alliance for Justice.
The Big Picture: 3 Types of Advocacy Organizations
Note:This information is general and does not substitute for legal advice.
The Connection discusses three types of advocacy organizations that can operate independently or in affiliation with each other. They are:
- 501 (c)(3) organizations include charitable, religious and educational groups. They pay no taxes on income, and contributions are tax deductible for donors. This is the only category of tax-exempt organizations with this fundraising advantage. One of the conditions for this favorable treatment is that these groups strictly prohibited from supporting or opposing candidates for public office. However, they are allowed to engage in a limited amount of legislative lobbying.
- A 501 (c)(4) organization generally pays no taxes on its income but it may not offer its donors a tax deduction. These "social welfare organizations" may conduct unlimited lobbying and may engage in partisan political campaign work, but only as a secondary activity.
- A 527 political committee pays no tax on its operating income, but does pay tax on its investment income. Donations to political organizations are not tax deductible. Its main purpose is to influence the selection of candidates for public office.
In Depth Chapters Detail IRS and Federal Election Commission Rules
501(c)(4)s
501(c)(4) groups exist to promote social welfare. They are exempt from paying federal income tax, but contributions to the group or membership dues paid to the group are generally not tax deductible. These groups or associations are allowed to engage in an unlimited amount of lobbying so long as the issues lobbied for are related to the purpose of the organization. To retain this special tax exempt status, 501(c)(4) social welfare initiatives must be their primary purpose.
There is a special provision of the federal Lobbying Disclosure Act (LDA) that applies exclusively to 501(c)(4)s. It prohibits them from receiving federal grants, loans, or awards if they engage in lobbying. This means that these groups must make a choice between federal money and advocacy. (Note:This rule does not apply to charities and religious organizations, which can use private funds to lobby even if they receive federal grants or contracts.)
Furthermore, in federal elections, 501(c)(4)s should exercise caution as it is a period of heightened scrutiny and the Federal Election Campaign Act governs activity supporting or opposing federal candidates. For example, 501(c)(4)s are not allowed to spend general treasury funds for public communications that support or oppose federal candidates. Broadcasts that refer to federal candidates 60 days before an election or 30 days before a primary ("electioneering communications") are likewise prohibited. Endorsements are allowed, but they must not be communicated to the public at large. However, internal communications with membership and employees and limited external communications, such as a press release, are allowable.
501(c)(4)s have the option of setting up a Separate Segregated Fund (SSF) for its partisan election activity. The money in the fund may only come from individuals and are subject to the contribution limitations of campaign finance regulations. An SSF is treated as a section 527 group and can take the form of a federal PAC, state PAC, or general independent 527. 501 (c)(3)s may NOT establish or operate an SSF. An SSF has as its purpose the funding of activities that (c)(4)’s are not allowed to engage in. The account of an SSF is kept strictly apart from that of its parent group.
Affiliated 501(c)(3)s and 501(c)(4)s
The Connection explains situations when it would behoove a 501(c)(3) to organize a related 501(c)(4), and vice-versa. For example, a 501(c)(3) can establish a separate 501(c)(4) to enable it to increase its lobbying efforts beyond what is allowed for a 501(c)(3). National organizations commonly employ a multi-structure approach comprised of 501(c)(3), 501(c)(4), and federal PAC. The key to success is demonstrating that the 501(c)(3)’s resources were not used to subsidize the partisan elecitoneering work of an affiliated 501(c)(4) or any of its affiliates, including an SSF or 527. The accounts of the two separate entities should be kept apart to facilitate each organization paying its own share of all salaries, equipment costs, and rent.
Grants and loans made from one organization to another are allowed so long as no 501(c)(3) funds are employed for a 501(c)(4)'s general administration or political purpose. There are also special rules governing the fundraising behavior of these groups and their donors. In addition to these organizational and financial rules, there are separate rules for the management of shared communications methods between organizations as well.
Political Organizations
A political organization is defined as a group whose primary purpose is to influence the nomination or election of candidates for public office. They are tax-exempt under section 527 of the Internal Revenue Code, and include candidate campaigns, political parties and federal, state and independent political committees. Political organizations are not limited to the same degree that the 501(c) organizations are. They are regulated by the IRS and election laws.
Generally, there are three types of political organizations. A federal political action committee (PAC) must register with the Federal Elections Commission (FEC) and is allowed to spend money raised subject to contribution limits to influence the outcome of federal elections. A state PAC registers under state election law, and spends money to influence state and local races. Independent 527 organizations must register and report to the IRS but are not required to register with the FEC and can pursue activities beyond the scope of normal federal and state PACs. There are a host of rules and fine line distinctions in this body of the law so groups should again exercise caution and seek legal advice when questions arise.
Summary
Nonprofits have many options when it comes to organizing, funding, and maintaining advocacy activities. The Connection provides clear explanations of the law and many examples of ways affiliated groups can work together for maximum advocacy impact. While care must be employed to ensure that resources, when shared, granted, or loaned, are employed for the appropriate purpose by the form of organization that is permitted to employ them, this guide makes it doable.