Legal Capacities and Limitations

501(c)3, (c)4, (c)3H, 527 … ?!

Chances are good that if you’ve done any voter work in the past few years, you recognize most, if not all, of the cryptic symbols above as designations for different legal entities available to your organization in your voter engagement efforts. And though we’ve all become more sophisticated in our understanding of the legal limits of these different formations, it never hurts to review the basics.

Most of this information is reprinted with permission from the SPIN Project’s excellent book, Loud and Clear in an Election Year, which covers the legal basics and much more about the art and science of messaging within a political framework. We encourage you to order your own copy; it’s a real go-to guide for nonpartisan electoral work.

One last disclaimer: we’re the Progressive TECHNOLOGY Project. We are not now, nor have we ever been, lawyers. We’re sharing the following legal information because we think this information from the SPIN Project makes very clear what you can and can’t do under different legal formations. However, if you have any doubts (and maybe even if you don’t) the best way to ensure that you’re on the right side of the law is to consult a lawyer who’s familiar with the peculiarities of election law in your area.

Power, Tax-Free

By Darci Andresen of AlterNet.org.

Excerpted from the SPIN Project’s Loud and Clear in an Election Year: Amplifying the Voices of Community Advocates.

The tax-exempt status of your nonprofit organization may not sound like a sexy subject, but many organizations are unclear about how they can participate in the political process. For these groups, even the schlumpy T-shirt method of getting the vote out approaches the status of racy lace underwear.

Express Advocacy: Communications that use specific “magic” words like vote for, defeat, reject, etc.

Issue Advocacy: Nonpartisan communications focusing on issues only, with no call to action – even implied – regarding a candidate.

501(c)(3): An organization exempt from tax under Section 501(c)(3) of the Internal Revenue Code. 501(c)(3)s may engage in some lobbying but may not engage in partisan electoral activity. Contributions to 501(c)(3)s are generally tax-deductible.

501(c)(4): An organization exempt from tax under Section 501(c)(4) of the Internal Revenue Code. 501(c)(4)s may engage in unlimited lobbying and some partisan electoral activity. Contributions to 501(c)(4)s are generally not tax-deductible, and some partisan electioneering activity can subject you to tax..

527: An organization exempt from tax under Section 527 of the Internal Revenue Code as a "political organization." 527 organizations that choose not to engage in "express advocacy" may avoid most disclosure requirements under federal election rules. If they also lack taxable income (by spending it as soon as it is received or by placing money in non-interest-bearing checking accounts), they may avoid some return requirements by the Internal Revenue Code.

Political Action Committee (PAC): Federal PACs are organizations created with the express goal of affecting the outcome of political elections. Federal PACs can endorse candidates, oppose candidates and make contributions to candidate campaigns. In many states, PACs may be formed to affect candidate elections or ballot measures, and in these state PACs are treated differently for tax purposes.

Nonprofit tax-exempt organizations come in a variety of styles, as indicated by their IRS designations: 501(c)(3), 501(c)(4) and 527. No matter what the style, each carries a certain power in its ability to educate and motivate voters.

Most of the larger organizations, such as the Sierra Club or the National Abortion Rights Action League, have set up both a 501(c)(3) and a 501(c)(4) organization. 501(c)(3)s are meant to educate and edify and are even allowed to do a limited amount of lobbying. For example, they can tell their members to call upon Congress to act on certain pieces of legislation. Off-limits to any 501(c)(3), however, is any level of partisan politicking – no proclamations such as “Bush sucks. Vote for any Democrat who can sit up by themselves.” However, 501(c)(3) organizations can criticize Bush Administration policies and rate his performance – very carefully.

Even with partisan electioneering benched on the sidelines, a large playing field still exists for 501(c)(3)s to exercise power in the political process by means of conducting voter registration activities, distributing voter education guides, disseminating information about candidates and issues, working on get-out-the-vote drives, hosting candidate debates, and other educational outreach regarding the election itself, democracy, the importance of voting, and so forth. Obviously 501(c)(3) groups should not do anything that may jeopardize their tax-exempt status (see below), but they should boldly implement the tools that are at their disposal.

More powerful bang for the buck is the 501(c)(4) organization. 501(c)(4)s can conduct unlimited lobbying and can engage in some partisan electoral activity so long as it’s not the organization’s primary purpose. Although donations to these organizations are not tax-deductible, the organizations themselves are still exempt from most federal taxes.

501(c)(4)s can provide candidate-related information to their members, endorse specific candidates, urge the election or defeat of a particular candidate, and encourage contributions to a candidate. The definition of membership is key: members include people who either pay annual dues to the organization or have a significant attachment to the organization, such as the right to participate in the organization’s governance. However, a 501(c)(4) can (and should) announce its endorsements to the press – an effective way of letting a wider public know of its support. Although the organization can’t coordinate its endorsement with a campaign, the campaign may independently publicize the organization’s support. Influential 501(c)(4)s that have name recognition with the public should use this tactic to amplify their power to motivate voters.

There is a specific type of 501(c)(4) organization known as an MCFL-type corporation, which has an ideological mission, is not formed for profit; is tax exempt under Section 501(c)(4) of the Internal Revenue Code; may not accept money from either corporations or unions, just individuals. If these criteria are met, MCFL–type corporations may make independent expenditures for express advocacy communications to the public legally, with FEC reporting. MCFL- type corporations may not make contributions to any candidate campaign, and may not coordinate with any candidate campaign.

Election activities 501(c)(3) organizations can engage in without jeopardizing their tax-exempt status:

Nonprofit organizations can engage their communities. With their large membership bases and extensive networks, nonprofits can educate large numbers of existing and potential voters without jeopardizing their tax-exempt status. The golden rule is simple: All election activities are permissible so long as they do not appear in any way, shape, or form to promote or critique any one candidate.

Much of what can be done within this rule is common sense. But there are many gray areas that may or may not bring scrutiny to the organization depending on when they do it, how, what they say, to whom, and so forth. Call on resources like the Alliance for Justice to clarify the details of your organization’s planned activities.

Federal tax law and state and federal election laws cover these issues. Nonprofits should adhere first to federal tax law, because it often dictates a higher standard than state and federal election law. 501(c)(4) and 527 organizations should pay careful attention to the rules of the Bipartisan Campaign Reform Act.

The following specifies what activities are permissible for 501(c)(3) organizations. Follow the colors to determine how your favorite 501(c)(3) organization can help make every election a victory for democracy.

Red: Don’t Do It

Endorse candidates.
Contribute funds to candidates.
Use organization resources or staff time for candidate election activities (ballot measures are OK, subject to lobbying limits).
Provide mailing lists to candidates for free or below market rate.
Solicit candidate pledges: Nonprofit organizations cannot ask a candidate to pledge to do or not to do something in their campaign or in their eventual election.
This provides implicit endorsement and is illegal.

Yellow: Proceed with Caution

Distribute, post on Web site, and send out on listservs voter education guides and legislative voting records that address a wide range of issues. Scorecards are not permissible if they indicate that a candidate's position is either “good” or “bad.” • Educate the public on issues as long as the information does not implicitly suggest that people should vote for a particular candidate.
Educate the public on candidates as long as information is presented on all candidates and on a wide range of issues and without trying to cast candidates in a favorable or unfavorable light. Web sites of 501(c)(3)s may link to the Web sites of all candidates in a race for educational purposes following the above guidelines.
Seek to influence party platforms, as long as you do it for all major parties equally.

Green: Do it!

Note: All green activities are really chartreuse because there are times when their permissibility is suspect. Check the Bipartisan Campaign Reform Act for the new rules on timing it outlines.

Register people to vote as long as there is no targeting of districts based on partisan demographics. Nor can you target swing or battleground districts ( ie you cannot target a “Democratic” area but you can target underrepresented communities, such as African Americans, Latinos, etc).
Run a get-out-the-vote (GOTV) drive. The same targeting rules apply, see above.
Host a candidate forum. Make sure all candidates are invited, rules are fair, and the audience is not stacked.
Candidate questioning. Organizations can encourage their members to ask all the candidates in a race the same (not loaded) question about a particular issue of concern to them. Groups can also continue to criticize public officials who they feel are detrimental to their issues -- even when that official is a candidate -- if this is an activity the organization also does in the same manner and scope in a non-election year.
Public education via earned media coverage of your issue. Use public education tools such as nonpartisan reports, opinion editorials, and letters to the editor to get the word out about your issue.
Direct public education about your issue by way of scorecards, Internet communications, door knocking, and so forth. All of these must be nonpartisan.
Ballot initiatives are also a tool to make proactive public policy on your issue.

Darci Andresen is the Associate Publisher of AlterNet.org, an online magazine providing a mix of news, opinion, and investigative journalism on subjects ranging from the environment, the drug war, technology, and cultural trends to policy debate, sexual politics, and health.

The Alliance for Justice also has a wealth of information on this topic, such as:

Permissible Activities Checklist for 501(c)(3) organizations (PDF)
Guide to Election Year Activities for 501(c)(4) organizations (PDF)

Overview