When nonprofit leaders think about engaging in political campaign activities, it is crucial to get taxonomy right in terms of the prospective organization’s development. That’s not only “tax”-onomy – relating to tax-exemption considerations, but also taxonomy in a broader categorical sense – correctly identifying potential politically-involved entities, their corporate structures, reporting obligations, and purposes.
It’s a bit like the biological taxonomy of horses and zebras. Horses and zebras look a lot alike. They have similar body structures, four hooves, and similar ears. They’re both part of the Equidae family. But they’re different species. They’re fundamentally different in important respects. For example, compared to horses, zebras are generally not easy to tame and aren’t good for riding.
Political nonprofits and other types of nonprofit entities are like horses and zebras with common characteristics: they both are nonprofit/nonstock in nature; neither have private owners; their earnings may not inure to the benefit of private interests in either case; and they are both frequently tax exempt under the Internal Revenue Code (“Code”). But despite these similarities, they are fundamentally different “species” of nonprofits.
Before undertaking the development of a political action committee, even experienced nonprofit leaders should take time to develop a clear understanding of the differences separating such dedicated political electioneering organizations from their other nonprofit cousins.
Backdrop: The PAC’s Politically Restricted Cousins
Tax-exempt organizations described under sections 501(c)(3) of the Code are strictly prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office. Even a small amount of political electioneering may destroy an organization’s exemption under 501(c)(3).[1]
Entities described under sections 501(c)(4) of the Code may participate in electioneering-related activities, provided that such organizations are not organized primarily for that purpose. Section 501(c)(4)s may support political candidates whose positions are in keeping with their mission, but again, such support may not constitute their primary purpose. Section 501(c)(4) organizations frequently establish, affiliate with, and fund independent expenditure-only committees, also called “Super PACs” to engage in significant political spending independent of campaigns.
Framework Differences Between PACs and other Nonprofits
Part of the challenge in thinking about political action committees, as compared to the typical nonprofit corporation, is that the two types of entities are established under different legal frameworks.
Nonprofit corporations that are exempt under sections 501(c)(3) and 501(c)(4) of the Code develop under two parallel state and federal legal frameworks. Structurally, the corporate form is established under the applicable state nonprofit corporation act. On the federal side, tax exemption on net revenues is established under section 501(a) of the Code.
PACs, on the other hand, are defined first under state and federal (and possibly local/municipal) election laws, rules, and regulations (collectively “Election Law”). PACs are defined under applicable election law by: the candidates they will support; the jurisdictions governing their activities; and the mechanisms through which their political support will take place. Section 527 of the Code authorizes tax exemption for PACs’ qualifying expenditures.
PACs: Not Just a Horse of a Different Color
Because PACs are developed under a different framework, such entities frequently have features that can be confusing to seasoned nonprofit professionals, much the same way a seasoned equestrian might react if she tried to ride a zebra: “This definitely isn’t just a differently colored horse!”
For example, many PACs are not incorporated. Additionally, many PACs do not have a governing board of directors or other similar body. These unincorporated associations may or may not have bylaws or the typical corporate attributes, such as conflict of interest policies. In their simplest form, PACs generally have two officers (e.g., treasurer and chair), who administer a bank account to receive contributions and fund electioneering activities. Under federal law, so long as an unincorporated association receives contributions or makes expenditures (either of which aggregate over $1,000 during a calendar year), it constitutes a “political committee” for purposes of compliance under the Federal Election Campaign Act (“FECA”). From a federal tax perspective, the expenditures will qualify for tax exempt treatment, provided they are made for the purpose of “influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization.” See Code Section 527(e)(2).
The above example addresses a PAC formed for the purposes of supporting the election of candidates for federal office. Committees formed to support only the election of state and local candidates will not likely be subject to FECA, but rather one or more of a host of state and local laws. Such laws thus should be evaluated, as may be appliable, before beginning a political committee’s development and registrations for state and local candidate election activities.
PAC Formation in Action
With these foundational considerations in mind, those seeking to engage in campaign or election-related activities should address key questions and related legal compliance matters as follows:
- Whether the committee intends to support a local, state, or federal candidate, or some combination;
- Whether the committee intends to support one or more candidates;
- The committee’s relationship to other entities, particularly -
- If the committee will work in conjunction with, or as a fund of, an existing corporation; and
- If the committee will coordinate, be affiliated with, or authorized by political candidates or their campaigns;
- Whether the committee intends to receive contributions from individuals, corporations, or both;
- Statutory contribution limitation requirements for both contributions to the committee and expenditures from the committee;
- The committee’s intentions to conduct independent campaign finance activities and/or coordinated activities with one or more political campaigns; and
- Depending on (1) above, the applicable jurisdiction’s registration and reporting requirements.
Thoughtful and proactive consideration of these issues provides an essential framework for correctly establishing the proper type of political committee, particularly before opening a bank account, receiving funds, appointing a treasurer, or collaborating with political campaigns. Doing so will better enable PAC leaders to undertake the sometimes challenging operational, reporting, and other compliance aspects of PACs.
