Mixing and Matching

Catherine Dunn

Corporate Counsel

03-01-2013

Nonprofits and politics don't always mix. And navigating this area can get complicated. So if you're looking for advice, better seek out a lawyer with relevant expertise.

This seems to be the lesson from a brouhaha that erupted in December, when Karen Handel gave a speech in which she suggested that Planned Parenthood ought to be investigated by the Internal Revenue Service. Handel is perhaps best known as the former VP for public policy at the Susan G. Komen for the Cure foundation. She sparked an uproar in February 2012, when the Komen foundation yanked funding from Planned Parenthood—before quickly reversing course (and accepting Handel's resignation).

In December it was a speech Handel delivered to the Family Research Council that ruffled feathers in the nonprofit world. In it, Handel wondered whether campaigning by Planned Parenthood's advocacy arm was running afoul of IRS rules.

After it was reported in the press, Abby Levine, legal director for advocacy at the Alliance for Justice, was amazed. "As I read her speech, what struck me was the misunderstanding about how different types of nonprofit organizations operate," says Levine, who posted a corrective to Handel's comments on the blog of the AFJ, which promotes advocacy by nonprofits.

Handel was baffled, apparently, that the Planned Parenthood Action Fund was able to campaign for Democratic candidates in the November election, given Planned Parenthood's status as a tax-exempt 501(c)(3). "How is that not a violation of campaign finance and IRS rules?" Handel asked, according to the Huffington Post .

Here's how: Planned Parenthood Federation of America, a 501(c)(3), and the Planned Parenthood Action Fund, which is actually a 501(c)(4), are what's known as affiliated nonprofits. So, for example, are the National Rifle Association of America, a 501(c)(4), and the NRA Foundation, one of no fewer than four 501(c)(3)s affiliated with the NRA. Even though the organizations share part of their names, "they are separate," says Levine. (Similarly, the Komen organization has one of each kind.)

There's a big difference between what each type of 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.

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. "The goal is to make sure the 501(c)(3) organization is not subsidizing or paying for" the activities of an affiliated (c)(4), says Levine.

She says it's important for related organizations to have separate boards of directors, separate bank accounts, and separate employee ID numbers. Shared staff 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 and some separate key officers, as well as holding separate board meetings and keeping separate board minutes.

The in-house attorneys at the American Cancer Society Inc. think of compliance this way: "You need to look separate, you need to act separate," says general counsel Timothy Phillips, who tracks any hours he spends on matters for ACS's affiliated 501(c)(4), the American Cancer Society Cancer Action Network. While creating an affiliated organization can be an advantageous business decision, the GC has to "advocate for strong and substantial control mechanisms," he says.

Implementing those mechanisms can be a day-to-day challenge, particularly when you're talking tax code. So ongoing staff education is crucial, says ACS deputy general counsel ­Katherine Karl, Phillips's in-house advocacy expert and a former tax attorney with Caplin & ­Drysdale. "This is all tax law, and that's not something that your average grassroots volunteer coordinator knows about," she says. "Translating and explaining the tax law in English in a way that makes sense is a training issue, and something we work on a lot."

Nonprofits should also be paying attention to their Web presence. 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."

Social media presents another emerging issue for affiliated organizations, according to Levine. "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.