About 501(c)3 and 501(c)4 nonprofit status, laws about nonprofits, and CRV ============================Warren D Smith June 2006====================== IRC 501(c)(4) provides for income-tax exemption of: Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare. An organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the community. Must be a community movement designed to accomplish community ends. Unacceptable is the position that an association's geographic area constitutes a "community." Local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes. *** Organizations exempt under IRC 501(c)(4) may engage in germane lobbying activities without the restrictions imposed on IRC 501(c)(3) organizations. No limit on lobbying so long as for it primary purpose. Lobbying can even be sole activity. However, an organization that loses its IRC 501(c)(3) status because of excessive lobbying or political campaign intervention may not be treated as an organization described in IRC 501(c)(4). 501(c)4 has less stringent or no organizational requirement, unlike 501(c)3 ???meaning??? 501(c)4: No limit on legislative activity so long as furthers "primary purpose"! But it is taxed. Exempt from Federal income tax unless the organization has unrelated business income. 501(c)4 donations not deductible as charitable contributions, but for 501(c)3 are deductible [by donors on their tax returns]. 501(c)3 eligible for bulk mailing discount, 501(c)4 not eligible. A section 501(c)(4) organization that engages in lobbying may be required to either provide notice to its members regarding the percentage of dues paid that are applicable to lobbying activities or pay a proxy tax. What is "Lobbying"? The 1987 hearings resulted in the enactment of several statutes. One of these, IRC 4912, concerns the lobbying activities of nonelecting public charities. For years beginning after December 22, 1987, certain organizations whose IRC 501(c)(3) status is revoked because of substantial lobbying activities are subject to a five percent excise tax imposed by IRC 4912 on their lobbying expenditures, for the year of loss of the exemption. "Lobbying expenditure" is defined in IRC 4912(d)(1) as any amount paid or incurred by a charitable organization in carrying on propaganda or otherwise attempting to influence legislation. What is "legislation"? Reg. 1.501(c)(3)-1(c)(3)(ii) provides that the term "legislation" includes action by the Congress, by any State legislature, by any local council or similar governing body, or by the public in a referendum, initiative, constitutional amendment, or similar procedure. Reg. 1.501(c)(3)-1(c)(3)(ii) limits the definition of legislation to actions by legislatures or by the public through referendum, initiative, constitutional amendment, etc. The implication that actions by administrative bodies do not constitute legislation is made explicit in the regulations under IRC 4911. Reg. 56.4911-2(d)(3) provides that legislation does not include actions by executive, judicial, or administrative bodies. Reg. 56.4911-2(d)(4) provides that the term "administrative bodies" includes school boards, housing authorities, sewer and water districts, zoning boards, and other similar Federal, State, or local special purpose bodies, whether elective or appointive. I CONCLUDE from this that attempting to influence D&R&other parties to change their internal rules, is NOT lobbying. To lobby more than the 20% budget limit on 501(c)3 organizations, you may wish to establish a separate 501(c)(4) tax-exempt organization. 501(c)(4) organizations serve purposes that are tax-exempt but which do not rise to the level of charitable purposes. 501(c)(4) organizations are classified as "social welfare" organizations. Initially this classification included civic groups and community betterment organizations, but these days the most common purpose of new 501(c)(4) organizations is lobbying. Funds given to the 501(c)(3) for its charitable purposes may not be used by nor commingled with the 501(c)(4). For tax purposes, 501(c)(3)s and 501(c)(4)s are similar in many respects, including most importantly, that their income is exempt from federal income taxes. The main legal difference, under the Internal Revenue Code, is that contributions to 501(c)(4)s are not tax-deductible to donors. http://www.hurwitassociates.com/l_lobby_primer.html : As a practical matter, many smaller and medium size organizations utilizing this combined structure try to limit the use of the 501(c)(4) in terms of revenues, staff time, and expenses. This allows organizations to take greatest advantage of favorable 501(c)(3) charitable contribution deductions, sales tax exemptions, and postal rates. Suppose the IRS audited your organization and determined that you were engaged in a pattern of excessive lobbying. The IRS would then likely offer the possibility of converting to a 501(c)(4) in lieu of revoking exempt status. You would then need to weigh the costs and benefits of becoming a 501(c)(4), and whether you might successfully negotiate with the IRS to preserve the status of 501(c)(3) by establishing a separate 501(c)(4). The whole 501(c)3 concept was modified by congress in 1976 in provisions not commonly appreciated but very helpful for CRV. When applying for 5-01(c)3 status you must intentionally "elect" (or not) to come under the 1976 modification, called "501(h)" using IRS form 5768 option 501(h) in additonal to form 1023. If you elect 501(h) then a tax is imposed under IRC4911(a)(1) on lobbying expenditures that are "excess", equal to 25% of that excess. But if the lobbying expnditures exceed 150% of the max allowed (i.e. excess is >50%) then if this continues 501(h) status will be lost. 501(c)3 organizations that do too much lobbying can lose their 501(c)3 status. RECOMMENDED BOOKS: Teaching Nonprofit Advocacy by David Arons; The Nonprofit Lobbying Guide by Bob Smucker; the Lobbying and Advocacy Handbook for Nonprofit Organizations by Marcia Avner; Real Clout by Judith C. Meredith and Catherine M. Dunham; A Voice for Nonprofits by Jeffrey M. Berry with David F. Arons, Nonprofits Handbook on Lobbying by J. T. Grupenhoff and J. J. Murphy; Giant Killers by Mike Pertschuk; So You Want to Make a Difference by Nancy Amidei. American Bar Association publishes a "Guidebook for Directors of Nonprofit Organizations" (280pp). It is available for $24.95 in paperback from PO Box 10892, Chicago, IL 60610-0892; 312/988-5522. BOARD OF DIRECTORS (BoDs): Corporations, whether for-profit or nonprofit, require a governing Board of Directors. MAJOR RESPONSIBILITIES OF BoDs (from BoardSource): 1. Determine the Organization's Mission and Purpose (CRV already has one) 2. Select and search for the Executive 3. Support the Executive and Review His or Her Performance 4. Ensure Effective Organizational Planning 5. Ensure Adequate Resources, raise funds 6. Manage Resources Effectively, assist in developing annual budget 7. Determine and Monitor the Organization's Programs and Services 8. Enhance the Organization's Public Image 9. Serve as a Court of Appeal 10. Assess Its Own Performance LEGAL RESPONSIBILITIES OF NONPROFIT CORPORATIONS [these in state of MN from Minnesota Council of Nonprofits 2700 University Ave. W. #250 St. Paul, MN 55114 Phone: (612) 642-1904 Fax: (612) 642-1517 http://www.mncn.org email: mcn@mncn.org] 1. File Form 990 with the IRS (and the State Attorney General's Office, Charities Division?) on an annual basis if the organization has more than $25,000 a year in financial activity (purely religious organizations exempt). 2. Have an audit completed if total organizational revenue exceeds $350,000 in a year; file with the charities division of the State Attorney General's Office. 3. Report change of name, address, or amendments to the Articles of Incorporation to the Secretary of State and pay fee for such changes. 4. Make Forms 990 and 1023 available to the public. 5. Report any Unrelated Business Income (UBI) to the State Department of Revenue and the IRS, and send tax payments with form 990T. 6. Withhold taxes from employees, and send withholding payments to the IRS and MN Department of Revenue. 7. Comply with laws that affect all employers including: ADA, OSHA, FLSA, FICA, COBRA, Family Medical Leave Act, unemployment insurance with state secy of commerce or secy of state. 8. Report any lobbying activities on Form 990, and register as a lobbyist if required by the Minnesota Ethical Practices Board. 9. Give receipts to donors for contributions above $250. 10. Collect sales tax on items sold by your organization, unless you are selling tickets to performances as a performing arts organization. 11. If the organization owns real property, pay property taxes or obtain an exemption from the county where the property is located. 12. If the organization sends bulk mail, pay regular bulk mail rate or obtain a nonprofit bulk mail permit form local post office. 13. Comply with the terms of donations; promises made to donors are legally binding. Funds given for specific projects or programs need to be kept separate. 14. Make sure any professional fundraisers register with the State Attorney General's Office, Charities Division; file copy of contract. 15. Record minutes of board and annual meetings preferably electronically so others can examine, but may wish to restrict viewability DESIRABLE DOCUMENTS FOR NONPROFIT CORPORATIONS 1. Certificate of Incorporation 2. Bylaws and mission statement 3. IRS Form 1023 which was filed for recognition as a 501 (c) (3) tax exempt organization 4. Copy of the current year's budget 5. Minutes of Board meetings 6. funding proposals 7. annual reports 8. audits 9. IRS form 990 filings 10. state filings for incorporation (and property tax exemption if any) with secretary of state or secretary of commerce 11. organizational chart (?) 12. board manual 13. bank account statements Each board member gets a manual about how the board operates, including its structure, policies, the nonprofit's charter documents, etc. BOARD best has odd # of members so no tied votes? Board may need to remove a recalcitrant member, so maybe want 5-member bd. Boards generally do not get paid. UNITED-WAY's CHECKLIST FOR NONPROFITS: (*=essential) 1.* The roles of the Board and the Executive Director are defined and respected 2. The Executive Director is recruited, selected, and employed by the Board of Directors. The board provide clearly written expectations and qualifications for the position, as well as reasonable compensation. 3. The Board of Directors acts a governing trustees of the organization on behalf of the community at large and contributors 4. board's nominating process ensures that the board remains appropriately diverse with respect to gender, ethnicity, culture, economic status, disabilities, and skills/espertise. 5.* board members receive regular training and information about their responsibilities social welfare6.* New board members are oriented to the organization 7. Board organization is documented with a description of the board and board committee responsibilities. 8.* The organization has at least the minimum number of members on the Board of Directors as required by their bylaws or state statute. (How many??? treas+secy+DirOfBd=3?) [BoardCafe gives as an example a minimum of 5 and a maximum of 15 board members. Some states specify a minimum, and some specify a formula for a minimum and maximum. MN law specifies a min of 3 BoD members and a max term-limit of 10 years.] 9. Bylaws conform to state statute and have been reviewed by legal counsel. 10. The bylaws should include: a) how and when notices for board meetings are made; b) how members are elected/appointed by the board; c) what the terms of office are for officers/members; d) how board members are rotated; e) how ineffective board members are removed from the board; f) a stated number of board members to make up a quorum which is required for all policy decisions 11. board of directors reviews the bylaws. 12. The board has a process for handling urgent matters between meetings. 13.* Board members serve without payment unless the agency has a policy identifying reimbursable out-of-pocket expenses. 14. The organization maintains a conflict-of-interest policy and all board members and executive staff review and/or sign to acknowledge and comply with the policy. 15. The board has an annual calendar of meetings. The board also has an attendance policy such that a quorum of the organization's board meets at least quarterly. [About 45 of the 50 states have provisions for telephone meetings. Q.Are Board meetings by e-mail legally valid? A. from http://www.assnlegalservices.com/freqasqueson.html : No. The essential reason is that by law governance of the nonprofit corporation is entrusted to a board of directors, not individual directors. This means the board is only authorized to deliberate and act as a group. Virtually every state has incorporated this concept by mandating that a valid meeting requires a quorum which is made up of a specified number of directors present at a meeting. But: California's typical statute requires that each Board member be able to participate simultaneously with each other Board member. In addition, the Board is required to adopt a "means of verifying" that all votes are validly cast and all poeple are who they say they are. So, "conference call" would be ok. Also electronic "chat room" is ok. That last one sounds good if we can get a script-copy to use for minutes... [CA law: a quorum may be as low as one-fifth of the board.] [MN law: board must meet at least once annually. 2 weeks notice recommended.] 16. Meetings have written agendas and materials relating to significant decisions are given to the board in advance of the meeting. Including a financial and activity report. Helps if time limits for each agenda item. OR law: summarized http://www.doj.state.or.us/charigroup/tipsbrd.shtml CLPI = CENTER FOR LOBBYING IN THE PUBLIC INTEREST 2040 S Street, NW, Washington, DC 20009 phone202-387-5048 | fax202-387-5149 | www.clpi.org : (a) The 1976 law provides ample leeway for nonprofits to lobby, and it protects those that elect the advantages of the 1976 rules from the uncertainties they would be subject to if they remained under the old "insubstantial" test. [If you do NOT elect 1976 law, then your lobbying must be "insubstantial" which is an undefined vague term.] (b) If elect the 1976 law, then nonprofit can spend up to 20% of the first $500,000 of annual expenditures on "direct" lobbying, 15% of next $500,000, 10% of next, and 5% of next - and up to $1million total can be spent on lobbying if over $17million in annual expenses which includes all other stuff (like staff). However: the limits on "grassroots" lobbying are 4 times smaller. [Unlimited lobbying of any form is permitted if it does not involve spending money, e.g. volunteer time, and does not involve forbidden activities. The 1976 law is strictly a money + forbidden activity test and thus ignores volunteers on the money side.] (c) Understanding what constitutes lobbying under the 1976 law is not difficult. In general, you are "direct lobbying" when you state your position on specific legislation to legislators or other government employees who participate in the formulation of legislation, or urge your members to do so. This includes lobbying foreign governments. You are "grassroots lobbying" when you state your position on legislation to the general public and ask the general public to contact legislators or other government employees who participate in the formulation of legislation. An ad that an organization has placed in a newspaper that takes a position on legislation, but does not call for action, is NEITHER grassroots nor direct lobbying. (d) Communications to the public that refer to a specific INITIATIVE or REFERENDUM are treated as DIRECT LOBBYING not grassroots since voters are the "legislature". Example: a nonprofit can advertise about a specific init/referendum, reflect a view on it, urge readers to vote for/against it, and ask their neighbors to also, and then charge this all as "direct lobbying" but if this were about normal legislation this would be "grassroots lobbying." (e) nonprofits cannot endorse, contribute to, work for, or otherwise support a candidate for elected public office (and that includes judges and officials elected in foreign countries), nor oppose one. But it is ok to support or opposed APPOINTED officials and you have total latitude in criticizing them, etc but less so with elected ones. Also nonprofits are allowed to endorse and fully support LEGISLATION. And organization leaders acting as individuals are free to campaign for candidates. (f) Nonprofits can disseminate the responses by candidates to questions on questionnaires but if the nonprofit has a very narrow focus then the candidates that answer "yes" are regarded by the IRS as implicitly being "endorsed" which is verboten. (g) Nonprofits can disseminate info about the voting records of officeholders but not suddenly before the election. (h) As part of a lobbying effort, nonprofits may testify before party platform committees at the national, state, or local levels. Responses to and accoutns of testimony may be reported in regularly published newsletters. Both parties platform committees must receive copies of the testimony. (i) Issue briefings for candidates must be extended to all candidates. (j) Nonprofits may use general purpose grant funds from private foundations for lobbying. (k) A private foundation may make a grant to a nonprofit to support a project that includes lobbying - as long as the amount budgeted for non-lobbying activities and the grant is not earmarked for lobbying. (l) All foundations may fund a number of public policy advocacy activities that are not considered lobbying under the 1976 lobby law. (m) Contributions to a nonprofit earmarked for lobbying are permissible but are taxed. (n) If you lobby the general public and Congress to urge them to contact a federal agency (e.g. Department of Education) to change a draft request for proposal (RFP) that is currently open for a public comment - that under the 1976 law is not lobbying since no legislation involved. Also if you lobby legislators to do something general or adopt some specific problem-solving method or principle (but not speaking of any specific piece of legislation e.g. because it does not yet exist) then that is not "lobbying". Note, "budgets" ARE "specific legislation" but a general call to, say, "cut taxes and raise spending" is probably not lobbying. www.npaction.org : state laws??? wikipedia: "1. Lobbying is the professional practice of public affairs advocacy, with the goal of influencing a governing body by promoting a point of view. 2. A lobbyist is a person who is paid (or volunteers) to influence (a) legislation as well as (b) public opinion." CRV will not be doing 1 or 2a in any way of much significance for some time, but will be doing both 2b and influencing political parties (which presumably do not count as "governing bodies"?) to change their INTERNAL rules. Also CRV may be involved in trying to get initiatives and referenda, although probably not for a while. CRV has no plans to try (in fact it plans to abstain from) electing any particular candidate or favor any particular party. IRS fact sheet: (a) all section 501(c)(3) organizations are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate. (b) Section 501(c)(3) organizations are permitted to conduct certain voter education activities (including the presentation of public forums and the publication of voter education guides) if they are carried out in a non-partisan manner. This includes registering people to vote and educating people about the environment, but not if there is any partisan bias (e.g, only registering people who say the things about the environment that agree with some candidate, would be verboten). (c) organization leaders acting as individuals are free to campaign for candidates. (d) it is ok to have political candidates speak at your events but it is dangerous since if the IRS decides that is done in a partisan-biased advantage-causing manner, trouble. Especially dangerous the nearer before election-time. (e) Under federal tax law, section 501(c)(3) organizations may take positions on public policy issues, including issues that divide candidates in an election for public office. However, section 501(c)(3) organizations must avoid any issue advocacy that functions as political campaign intervention. (f) Allowed to advertise with full page ad saying "call or write senator C to urge him to adopt position X and vote Y" if not mentioning the election or candidacy of Senator C, the issues has not been raised as distinguishing Senator C from any opponent, and there is pending legislation on X,Y. CLPI: People sometimes confuse advocacy and lobbying. Legal defn of Lobbying usually involves attempting to influence legislation. Advocacy covers a much broader range of activities that might, or might not, include lobbying. One way of differentiating between the two terms is to understand that lobbying always involves advocacy but advocacy does not necessarily involve lobbying. Nonprofits that lobby sometimes wonder whether they are coming close to the permissible limits of lobbying activity that they may conduct. If your group has elected to come under the 1976 lobby law then it's relatively easy to make an educated estimate about whether your organization is approaching the maximum it may spend on lobbying. Critical to the 1976 law are the provisions declaring that many expenditures that have some relationship to public policy and legislative issues are not treated as lobbying and so are permitted without limit. For example ... Nonprofits can play an important and potentially leading role in initiative and referenda processes and they should know the very favorable legal latitude for such involvement. Congress sent this unambiguous message when it enacted the exceedingly helpful 1976 lobby law. The same message came from the IRS in regulations issued in 1990. Together, the law and regulations provide wide latitude for charities to lobby. But the law only provides this latitude for charities that elect to be covered by it. In most circumstances, nonprofits should become subject to this law - not only because it provides liberal limits on how much they can spend on lobbying, but also because it provides very clear and helpful definitions of what activities related to legislation do not constitute lobbying. Voter Education Nonprofits sometimes confuse working for the election of a political candidate with lobbying. These two kinds of activity are in fact very different. It is perfectly legal (and highly appropriate) for a nonprofit to work for the passage of a particular piece of legislation, during a political campaign or at any other time. Working for the election of a particular candidate, however, whether at federal, state, or local levels is strictly prohibited and is cause for the nonprofit to lose its tax-exempt status. While a 501(c)(3) group cannot work on behalf of or against candidates, there are a number of other voter education activities, such as those described here, that it can legally engage in. Sierra club / trade assocs / elects bd by members. Sean Walker (Oct 2009): After looking around for a while, the only state I found that allows for a fully virtual corporation (no physical meetings, location, etc.) is Vermont. There is a $75 incorporation fee, and minimum board size is 3. Several other states offer the ability to use electronic meetings, but many need you to be able to hear the person, and all that I found required a physical office... ...Ok, the internet is highly unhelpful for finding this kind of information. After several hours of searching, I have found: Vermont allows the creation of virtual LLCs, but not normal Corporations. LLCs can file to be taxed as Corporations. Federally, LLCs can become nonprofit, presumably by being taxed as Corporations and then filing for nonprofit status. On the other hand, the state also needs to allow the nonprofit LLC, and I can't find any information as to whether that is allowed in Vermont. Therefore, I have no idea if we can create a Virtual Nonprofit Organization. As such, I suggest we contact a Vermont Nonprofit Lawyer who will help us Pro Bono.