Advocacy works best when various types of organizations join forces, such as the increase in 501(c)(3) organizations collaborating with 501(c)(4)s social welfare organizations.
Generally, Internal Revenue Code (IRC) Section 501(c)(3) organizations can educate the public about issues, engage in nonpartisan voter activities without restrictions, and perform lobbying activities within certain limits. 501(c)(3) organizations classified as private foundations, however, have special limitations and are generally prohibited from engaging in lobbying and from funding lobbying efforts — while 501(c)(4)s are subject to fewer restrictions around lobbying or legislative and political activities.
Below we outline key considerations private foundations should address before working with a 501(c)(4) organization.
501(c)(4) organization permissions and exemptions
A 501(c)(4) organization is exempt from federal income tax — other than on income from carrying on a trade or business unrelated to its exempt purposes — in the same manner as a 501(c)(3) organization.
A charitable purpose under 501(c)(3) will also qualify as an exempt purpose under 501(c)(4). While contributions to a Section 501(c)(4) organization aren’t deductible as charitable contributions, a 501(c)(4) may receive unlimited, or nondeductible, donations from any source.
As of May 26, 2020, the IRS issued final regulations on donor disclosure providing that social welfare organizations under section 501(c)(4), professional and trade associations under section 501(c)(6), and many other types of organizations required to file a Form 990 series return are no longer required to disclose their large donors of $5,000 or more on Schedule B.
Lobbying
Unlike 501(c)(3) organizations, 501(c)(4)s can engage in lobbying, or fund lobbying efforts, to an unlimited extent — so long as the lobbying furthers an exempt purpose, such as protecting wilderness or ending homelessness.
They can engage in partisan activities such as independent expenditures in federal elections for ads that don’t expressly encourage the audience to vote for or against a candidate but suggest support or opposition to a candidate in the context of issue advocacy.
They can also make political campaign contributions and expressly support or oppose candidates to a limited degree, the extent of which isn’t well-defined. They may also form affiliated political action committees (PACs) to receive contributions and make such expenditures.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.
Depending on its activities, a 501(c)(4) organization may be subject to regulation by the Federal Election Commission and state agencies that regulate lobbying and political campaign activities.
Examples of lobbying activities considered unlimited for 501(c)(4) organizations but prohibited for private foundations include:
Communication with legislators that refer to a specific legislative proposal and reflects a view on the proposal
Communication with the public that refers to and reflects a view on an initiative, referendum, bond, or other ballot measure
Examples of advocacy that aren’t considered lobbying, and which a private foundation can conduct, include:
Research not primarily conducted in preparation for lobbying
Communications to anyone which discusses but doesn’t reflect a view on a specific legislative proposal. Most communications to the public that reflect a view on a specific legislative proposal — but not a ballot measure — aren’t lobbying so long as they don’t include a so-called call to action.
Communications made to influence an executive administrative, or judicial decision, rather than a legislative decision, such as with school boards
Political campaign activities
A Section 501(c)(4) organization may engage in political campaign activity, including making expenditures to influence the selection, nomination, election, or appointment of any individual to a political office. If it does so, however, the organization is subject to a tax.
The tax payable is the highest corporate income tax rate — currently 21% — on the lesser of the organization’s campaign expenditures, or its investment income.
A 501(c)(4) organization’s contributions to a PAC, whether one created by the 501(c)(4) organization or an unrelated PAC, will generally be campaign expenditures. A Section 501(c)(4) organization can, however, pay certain administrative expenses of a PAC that it creates without incurring tax liability.
Section 501(c)(3) organizations are expressly prohibited from participating in, or intervening in, any political campaign on behalf of, or in opposition to, any candidate for public office.
Many available options exist to promote issues of interest, educate candidates about those issues, inform the public about candidate views, and encourage and enable voter participation in the election. Private foundations should always consult appropriate counsel before conducting activities or giving grants which may be classified as political activity at the risk of losing tax exempt status.
Key considerations for organizations that work together
Related 501(c)(3)s and 501(c)(4)s should know how to interact with each other without causing exemption issues for the 501(c)(3) organization.
Because the Section 501(c)(4) organization can engage in activities that are prohibited for Section 501(c)(3) organizations, private foundations can’t subsidize the Section 501(c)(4) organization.
Conversely, because the Section 501(c)(4) organization could permissibly undertake all the foundation activities, the Section 501(c)(4) organization may permissibly subsidize the organization.
Board makeup
A key decision point is the composition of the board of directors.
While no specific tax law requirements exists for the board of a 501(c)(4) organization, the IRS could be resistant to issuing a determination of 501(c)(4) status to an organization that has, as its sole board members, two individuals who are immediate family.
It would be desirable to include on the board at least one unrelated, like-minded individual. Such individual(s) should be independent.
If the founders of the private foundation — individually or collectively as a group — have more than 35% of the voting power in the 501(c)(4) organization, the 501(c)(4) would be considered a disqualified person with respect to the private foundation under the self-dealing rules.
Those rules will prohibit most transactions between the two entities and require careful procedures to ensure that the 501(c)(3)’s assets aren’t used in a way that benefits the Section 501(c)(4) organization.
Shared facilities
It’s permissible for the 501(c)(4) organization to be the lessee of facilities and the owner of equipment used by both the 501(c)(4) organization and the private foundation. However, no facilities or equipment owned by the private foundation should be used by both organizations.
For this reason, it is simplest to have all ownership and leasehold interests in the hands of the Section 501(c)(4) organization, and to have the Section 501(c)(4) bear all costs associated with facilities and equipment.
While it would be a prohibited transaction for the private foundation to reimburse a Section 501(c)(4) organization that’s a disqualified person for its share of expenses, the private foundation could pay third-party vendors directly for its share of expenses, such as utilities.
Shared employees
With respect to employees, it would be permissible for the Section 501(c)(4) organization to employ all employees and to allow its employees to perform some of its activities on behalf of the 501(c)(3) private foundation.
Alternatively, the two organizations could employ some individuals whose work would be entirely for the private foundation; the Section 501(c)(4) could employ other individuals whose work could be entirely for the Section 501(c)(4) organization, or divided between the Section 501(c)(4) organization and the private foundation.
The 501(c)(3) private foundation can’t compensate the Section 501(c)(4) organization for services performed by the Section 501(c)(4)’s employees, subject to limited exceptions — such as for accounting or investment services performed by the Section 501(c)(4) employees.
The foundation employees can’t provide expertise or share information with the Section 501(c)(4) organization to further its activities.
