A Nonprofit is a Nonprofit, But Not All Nonprofits Are Alike

Catherine Dunn

Corporate Counsel

01-03-2013

For anyone relying on Karen Handel, the ex-senior VP for public policy at the Susan G. Komen for the Cure foundation, for a solid interpretation of U.S. tax law, they may want to read this blog post from the Alliance for Justice first.

In the December 13 post, AFJ legal director for advocacy Abby Levine takes Handel to task for her questioning of Planned Parenthood’s tax-exempt status in a recent speech she delivered to the Family Research Council. Handel sparked an uproar last year when the Komen foundation yanked funding from Planned Parenthood (a decision it reversed just days later); in this latest speech, Handel wondered aloud whether the group was running afoul of the IRS.

“As I read her speech, what struck me was the misunderstanding about how different types of nonprofit organizations operate,” Levine says.

Per the Huffington Post’s coverage of the speech:

Handel went on to question Planned Parenthood’s status as a 501(c)(3) nonprofit. She pointed out that the organization’s political arm, called the Planned Parenthood Action Fund, campaigned for President Barack Obama and other Democratic candidates, while the health organization itself remained apolitical.
“How is that not a violation of campaign finance and IRS rules?” Handel asked. “I would ask you this: If the NRA [National Rifle Association], if the Family Research Council through its nonprofit was out blatantly campaigning for a candidate, don’t you think the wrath of the IRS would be raining down on you? I would guess it would be.”

Not so, according to Levine, who countered with a primer on affiliated nonprofits—such as Planned Parenthood, a 501(c)(3), and the Planned Parenthood Action Fund, which is actually a 501(c)(4).

Even though the organizations share part of their names, “they are separate organizations,” says Levine. “They have separate websites,” and distinct legal frameworks.

There’s a big difference between what each organization is allowed to do. Both 501(c)(3)and 501(c)(4) organizations are tax-exempt, but only donations made to a (c)(3) are deductible to a donor. “As a result, 501(c)(3)s are more limited in what they can do,” Levine says.

In particular, they’re more limited in the political sphere. 501(c)(3)s are not allowed to support or oppose political candidates, and they’re only allowed to engage in limited lobbying.

By contrast, 501(c)(4)s “can use all their money for lobbying, if they want to,” says Levine. They’re also allowed to support or oppose political candidates—although that can’t be the organization’s primary purpose. In putting money behind, or against, candidates, 501(c)(4)s also need to follow federal and state elections laws, says Levine.

But to keep an organization’s tax-exempt status out of jeopardy, it’s important to distinguish between related organizations—especially when it comes to funding.

“They can have similar names. They may have the same staff working for both organizations,” says Levine. But, she adds, “the goal is to make sure the 501(c)(3) organization is not subsidizing or paying for” the activities of an affiliated (c)(4).

She says it’s important for related organizations to have separate boards of directors, separate bank accounts, and separate employee ID numbers. Employees should make use of time sheets to distinguish hours worked for each entity. If the entities share office space, entering into a cost-sharing agreement for things like rent and telephone service is another common practice.

“It’s a contractual agreement between two separate organizations,” says Levine.

Indeed, Venable partner Jeffrey Tenenbaum deems governance structure and money matters the two most “sensitive areas” for separate, but related, nonprofits. For instance, how much overlap on the board can you have? Can the key officers be the same?

“The reality is, there are no bright-line rules,” says Tenenbaum, who chairs the firm’s nonprofit organizations practice group. His firm recommends having at least some separate board members, some separate key officers, as well as holding separate board meetings and keeping separate board minutes.

Nonprofits should also be paying attention to their web presence and communications. In a 2009 IRS memorandum, the agency took issue with a 501(c)(3) organization’s website that housed the website of its affiliated 501(c)(4).

Venable partner George Constantine III analyzed the memorandum in the February 2011 issue of Association Law and Policy. “Given the fact that the 501(c)(4) pages looked ‘virtually indistinguishable’ from the 501(c)(3) pages,” he wrote, “the IRS concluded that it would treat the statements and communications on those pages as the communications and statements of the 501(c)(3) organization, with potentially significant adverse tax consequences to the 501(c)(3).”

Levine says social media presents another emerging issue for affiliated organizations. “Is it the Twitter account of the (c)(3), or is it the Twitter account of the (c)(4)?” she asks.

Use separate Twitter handles and Facebook accounts for each entity, Levine recommends, and if the 501(c)(3) wouldn’t put a statement on a letterhead or in a speech, don’t put it on social media.