WHAT SHOULD NONPROFITS KNOW ABOUT 501(C)(4) ORGANIZATIONS? ESPECIALLY IN AN ELECTION YEAR?

Breaking news: The US Supreme Court ruled earlier this week that politically active nonprofit groups will have to disclose the identity of certain donors (those giving more than $200) when these organizations advertise for or against a political candidate. 

In this article, we explain why a nonprofit may want to form a separate C4, and we look at the growing and controversial role C4s are playing in our elections.

“C4s” — short for 501(c)(4) nonprofits — “are going to play a very large role in electoral politics,” commented nonprofit attorney Rosemary Fei in an interview for this article.

There are frequently valid and compelling reasons for 501(c)(3) nonprofits to start their own C4s, but at the same time, C4 organizations are also vulnerable to abuse in elections, so having a c4 affiliate can raise concerns for some.

What the heck is a C4 anyway?

C3s . . . C4s . . . sounds like we’re talking in code? We are: the Internal Revenue Code. For most people, the term “nonprofit” refers to a corporation described in the Internal Revenue Code Section 501(c)(3). These are the tax-exempt “charities” and donations to them are tax-deductible to individuals. For short sometimes people say “C3s.”

But to lawyers and regulators, “nonprofit” can mean one of many different types of corporations. For instance, labor unions are C5s; chambers of commerce are C6s; cemeteries are C13s. All of these other 501(c) corporations are exempt from corporate income tax, but donations to C3s are the only ones that are tax deductible.

Okay so what is a 50(c)(4) and why are we hearing so much about them lately?

A 501(c)(4) is a “social welfare” organization, and “it’s a mushy term,” says Rosemary, “a catch-all for many types of organizations that serve the public yet don’t quite qualify as 501(c)(3) charities.” Traditional examples of C4s are volunteer fire departments and service clubs such as Rotary, while C4s formed recently are more likely to be politically involved. An important distinction is that donations to C4s are not tax deductible (whereas donations to C3s are).

We’re hearing more about them in an election year for two key reasons:

  • C4s can endorse candidates (which C3s can’t)
  • C4s may not have to disclose their donors (which C3s do — although only to the federal and state government) (note: this requirement is changing in some circumstances as we noted earlier).

As a result of these two attributes, unfortunately C4s have become a favored conduit for “dark money” — vehicles for which large sums of money can be used to support or oppose candidates.

How will this affect the 2018 election?

We don’t know yet. But we do know that election funds through C4s are substanial: in the 2012 election, just over $80 million was spent; $48.5 million was spent in 2016, and $43.9 million has been spent thus far in 2018. (Center for Responsive Politics).

From a public policy standpoint, the non-transparency of 501(c)(4) organizations goes in the opposite direction of campaign contribution limits and disclosure laws. While it’s clear that such laws have not prevented dark money, there are still limits such as those in California, where individuals cannot give more than $4,400 to an election campaign for a state senate seat and their contributions must be disclosed. But there are no limits to what an individual can spend to support or oppose a candidate if it goes through a C4.

Should our nonprofit start a C4?

Despite the abuses, the C4 framework also has a valuable role to play for many nonprofits. Many nonprofits exist as two (or more) corporations: one is a 501(c)(3) and one is a 501(c)(4). For example, the Sierra Club endorses candidates through its C4 incorporation, and raises tax-deductible funds for research and education through its C3 incorporation.

We asked Maricela Morales, executive director of CAUSE in Ventura County, why they created a C4:

By 2012 we had been doing organizing for ten years — on immigrant rights, environmental justice, education. And naturally people would ask us: “Who’s good in this race for school board?” And we were silent, limited in what we could say.

But that led us to asking ourselves: if we had a C4 we could add to our toolbox [for example, endorsing a candidate for the school board], be able to engage and educate our base on questions they were asking anyway.

Since 2013 (when we got the C4) for example, in Oxnard through our C4 work we actively worked for district elections. Through our C3 we proposed maps, and the city unanimously chose our map. And now it’s time for us to follow-up through our C4 to find candidates to run in those districts who will be leaders and advocates.

We don’t just want a say in what policies are in place. We want a voice in who is going to implement those policies!

Like CAUSE, the key reasons for nonprofits creating C4s are because you want to be able to do more lobbying, to endorse candidates, and “and to raise money for the person-to-person work of engaging voters, particularly voters that no one else is speaking to.”

“While having a C4 affiliate can significantly expand how a 501(c)(3) nonprofit can accomplish its objectives, if it’s not done properly, the C4 can get the C3 in trouble,” Rosemary cautions. Board and staff will need to take into account the additional, sometimes complex bookkeeping and accounting that will be required to ensure that C3 and C4 activities are being tracked and paid for separately. Working with an attorney experienced in advising C3/C4 nonprofits is of course a good idea, as is working with your auditor to set up the right controls and charts of accounts.

“There are legitimate ways to make good use of both,” Rosemary says. “And if you’re part of a social movement and see your role as influencing policy in an ongoing way — not just around an election — it could very well be the right next step for you.”

Note: Regulations affecting C4s are constantly being examined, challenged, and changed. Not only do individual nonprofits need to be informed about how new rulings may affect them, but the nonprofit community must also participate in how C4 law is changed.

Further resources and reading:

Attorney Gene Takagi has an excellent Step-By-Step guide to forming a C4

IRS: Social Welfare Organizations

Photo credit:​illustration at top of article is by Dale Glasgow for HR Magazine 

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