Many of the most visible and politically active nonprofit organizations in the United States are classified by the Internal Revenue Service (IRS) as 501(c)(4) social welfare groups. The National Rifle Association (NRA), National Organization for Women (NOW), American Civil Liberties Union (ACLU) and Sierra Club, for example, are high-profile 501(c)(4) organizations that are active participants in the nation’s public policy process. They lobby for and against legislation, get issues on policymakers’ radar screens, and educate and mobilize the public around election time, with 2004 being no exception.
Foundations should consider providing support to their 501(c)(3) charitable grantees to help these groups develop the institutional expertise required to establish and manage—legally and effectively—affiliated 501(c)(4) organizations. Providing support would help grantees work toward effecting long-term systemic changes that would assist in fighting the root causes of the social, economic and political problems besetting their constituents.
According to the IRS, “To be considered operated exclusively for the promotion of social welfare, an organization must operate primarily to further (in some way) the common good and general welfare of the people of the community (such as by bringing about civic betterment and social improvements).” Many organizations that fail to receive 501(c)(3) charitable status—because, for example, their program focus is too narrow or they are explicitly political—are granted 501(c)(4) status. According to data from the National Center for Charitable Statistics, there are 120,000 501(c)(4) organizations on file with the IRS, compared with nearly 1 million 501(c)(3) groups. Additional data from the National Center for Charitable Statistics suggest that 501(c)(4) organizations rely on membership dues and other individual contributions for a large part of their budgets. PoliticalMoneyLine.com tracks the activities of about 300 politically active 501(c)(4) organizations and reports that these organizations earned $1.7 billion in income in 2003.
Although many 501(c)(4) organizations are politically active—nonprofit sector researchers often refer to them as “social advocacy organizations”—it is important to remember that most are decidedly apolitical and are merely given 501(c)(4) status because they don’t easily fit into another nonprofit category. For example, 501(c)(4)s include the following varied groups:
Unlike 501(c)(3) charities, 501(c)(4) organizations cannot offer their donors the ability to make tax-deductible donations, and they generally do not receive foundation grants. As a trade-off, these social welfare organizations can engage in unlimited lobbying activities, while charities may only do an insubstantial amount of lobbying. Similarly, charities are barred from doing any kind of direct electoral work, but 501(c)(4) groups can encourage their “members” to support particular candidates for public office. The definition of “member” is fairly broad and open to legal interpretation—by both the IRS and the Federal Election Commission (FEC)—with some organizations purportedly counting visitors to their Web sites as members.
Although charities must restrict the amount of lobbying they do, they are permitted to engage without limit in a wide range of other kinds of advocacy activities that do not fall under the IRS’s definition of lobbying, such as public education, writing op-eds on general issues of concern, holding community forums, etc.
Many savvy and well-financed 501(c)(3) and 501(c)(4) organizations know how to adapt to tax laws and regulations that prevent them from engaging in unlimited lobbying and limited electoral work or receiving tax-deductible and foundation gifts. By bringing a 501(c)(3) and a 501(c)(4) together in one organization—and carefully managing the flow of money and staff between the two organizations—groups can receive tax-deductible and foundation gifts and continue to lobby extensively without violating the law. The NRA, NOW, ACLU and Sierra Club, for example, all have this structure in place and receive hundreds of thousands of dollars—if not millions—from foundations and individual givers through their 501(c)(3) affiliates, which generally have names that are similar to the 501(c)(4) entity—for example, the Sierra Club is a 501(c)(3) organization, while the Sierra Club Foundation is a 501(c)(4). Many other large national organizations use a similar structure.
Social welfare groups are also allowed to have an affiliated political action committee (PAC), further distinguishing them from charities. PACs allow organizations to get directly involved in elections at the state and national levels by providing money to candidates running for public office. The NRA, NOW and Sierra Club all have at least one PAC affiliated with the main national organization, and have pumped millions of dollars into the last several elections.
One the most visible and active 501(c)(4) organizations is MoveOn.org, which builds grassroots and financial support for progressive political ideas and candidates for public office. MoveOn.org has its own PAC, the MoveOn PAC, which was heavily engaged in the 2004 elections. Billionaires Peter Lewis and George Soros have given MoveOn.org and MoveOn PAC millions of dollars in donations.
Americans for the Arts, a 501(c)(3) charity that has the broad mission of advancing the arts in America by “representing and serving local communities and creating opportunities for every American to participate in and appreciate all forms of the arts,” recently established a 501(c)(4) organization called the Americans for the Arts Action Fund. In 2002, Ruth Lilly—the pharmaceutical heiress—gave Americans for the Arts $120 million. Part of this donation is being used to support the fund’s work.
According to a press release from Americans for the Arts, there is a need to connect citizens to lawmakers around the issue of government funding for the arts. The Action Fund will allow the organization to make these connections, through an extensive grassroots organizing and mobilizing effort. The Action Fund also plans to issue a report card on policymakers’ voting records for arts funding support. It hopes to reverse the trend of declining federal and state government financial support for arts programs in communities and the public education system.
National organizations that consist of a social welfare organization, an affiliated charity and a PAC have the best of all worlds—they can engage in unlimited lobbying, financially support candidates for public office, receive foundations grants, and offer donors the ability to make tax-deductible gifts. Although it’s not difficult to set up these hybrid organizations, a degree of legal and accounting expertise is necessary. And an organization’s legal and accounting expertise is highly dependent upon its budget—the better financed an organization is, the more likely it is to have the counsel needed to establish affiliated organizations and run them effectively and legally—consider that Americans for the Arts was able to establish a 501(c)(4) thanks to Ruth Lily’s multimillion-dollar gift. Further, many smaller charitable organizations might be daunted by the paperwork required to establish a complex structure, or fear that if they run afoul of tax laws (by becoming too involved with a politically active organization, for example), they will lose their coveted 501(c)(3) status.
In fact, most charities are so afraid of losing their tax status that they don’t engage in any type of lobbying at all—even though tax laws clearly state that they may do so up to certain spending limits. Many nonprofits prefer not to stray from their primary service-delivery programs, either for fear of losing their tax-exempt status or because of a desire to dedicate all of their resources directly to their constituencies. But if organizations want to effect permanent, systemic changes, they need to also be prepared to advocate—including by direct and grassroots lobbying—for their causes and constituencies.
Since foundations of all shapes and sizes are fond of trumpeting the invaluable “technical assistance” that their program staffs provide to grantees, they should consider providing the kinds of assistance that can be used to establish a 501(c)(4) organization, such as legal and accounting training that will give grantees the skills and expertise necessary for managing such an organizational structure.
Data and experience show that there is precious little foundation support for nonprofit advocacy. For example, the Foundation Center reports that only 1.2 percent of all grant dollars in 2002 were allocated for social action and civil rights work (see FC Stats online at fdncenter.org). This outcome can be traced to a variety of causes, such as overly conservative advice from foundation attorneys, foundation trustees fearing bad press or any kind of political exposure, and foundation staffs’ discomfort or lack of expertise or experience with the mechanics of advocacy. Given this reluctance to support 501(c)(3) advocacy, it is not probable that foundations will help these groups establish 501(c)(4)s. But if foundation board and staff members want to use their grant dollars to eliminate basic social and economic inequities, then putting more resources into supporting advocacy organizations and programs is critical.
Based on the record amount of money that people gave to candidates for public office in this past election—and the deep ideological divide across the United States—this is clearly one of the most politically charged eras in the nation’s history. The nearly 1 million charitable nonprofit organizations in the United States come into contact more frequently with people and communities most in need than any other type of institution. Giving them the capacity to maximize their voices at this time in the policy process is a responsibility to which foundations should give more serious thought and consideration. Providing technical assistance that really matters—related to advocacy, lobbying and political representation—is a good place to start.
 The IRS defines “lobbying” as a specific activity that ultimately involves urging lawmakers to take specific positions on specific pieces of legislation. See the IRS’s instructions for Schedule A (Form 990 or 990-EZ) at http://www.irs.gov/pub/irs-03/i990sa.pdf.