The Details Matter: Carefully Operating Related 501(c)(3) and 501(c)(4) Nonprofits

The IRS recently denied 501(c)(3) public charity status to a social justice organization that was related to a 501(c)(4) social welfare organization. (PLR 201408030)  What went wrong?  Plenty, with much to learn for nonprofit organizations seeking to navigate the increasingly choppy waters of politically tinged activities.

Given the increasingly choppy waters of politically-tinged activities, closely related 501(c)(3) and 501(c)(4) organizations should be very attentive to the small things to ensure their larger missions do not similarly get derailed.  

Start with the Basics

First, remember that 501(c)(3) organizations must be charitable, in order to qualify for the privilege of receiving tax-deductible contributions. More specifically, they must be both organized (i.e., on paper) and operated (the real deal) primarily for specific qualified purposes (religious, educational, charitable, etc.).  Any other activities may only be “insubstantial” in relation to the whole, including lobbying.

Second, keep in mind that a public charity needs to carefully maintain its independent identity.  If its leaders want to collaborate with other organizations that do not share such privileged tax status, whether they are social welfare organizations or even for-profits, they must protect the public charity’s assets and avoid line-blurring between the organizations’ activities, internal operations, and control.

Tax Exemption Double Standard? Absolutely.

Not all tax exemption standards are created equal. Nonprofit organizations recognized as exempt from federal income tax under Internal Revenue Code (IRC) Section 501(c) are often surprised when subsequent state-based applications for exemption from property and sales tax are denied.

Federal Exemption:  The Starting Point