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IRS proposal could open nonprofit conversation

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First things first: 501(c)(3)s are not 501(c)(4)s.

When it's put that way, chances are you intuited the distinction. But it's not always put that way — often they're referred to collectively as nonprofits or tax-exempt organizations.

That's why news that the IRS proposes to amend the 501(c)(4) regulations prompted the Pennsylvania Association of Nonprofit Organizations to post a request.

"Please be clear that this guidance is for 501(c)(4) noncharitable nonprofit organizations," it said. "Since 1954, charitable nonprofits organized under section 501(c)(3) of the Internal Revenue Code may not and do not engage in partisan political electioneering activities at the center of the proposed new guidance."

Then came the reason: "With the giving season upon us, confusion in the public's minds about whether their charitable donations to charitable nonprofits might somehow be used to engage in political activity can be devastating to year-end fundraising and have a significant impact on charitable nonprofits' ability to serve people in their communities."

This, then, is not about the threes. Neither is it really about the many fours that hew closely to the social welfare model.

It's about the fours that have a political action component and, since the U.S. Supreme Court's Citizens United decision in 2010, have become a financially significant political force.

Andrew Hildebrand, assistant professor of accounting at Lebanon Valley College, says the Citizens United case opened the floodgates for organizations to capitalize on the situation and pump money into politics.

There is a limit of sorts on what the fours can spend — at least 60 percent of both time and money on social welfare promotion, and less than 40 percent on political campaign intervention. But with regulations that hadn't been intended for a post-Citizens landscape, enforcement procedures weren't clear, and then there was the highly politicized targeting scandal earlier this year.

So, Hildebrand says, when the IRS proposed late last month to amend the regulations to exclude candidate-related political activity and move from its intensive "facts and circumstances" inquiries to more definitive rules, it wasn't to a neutral audience.

The IRS indicated that it expected many comments on the proposal, and it is also asking for feedback on what proportion of a four's activities must promote social welfare.

"There's going to be a lot of money put in on all sides to talk about this" and its political context, Hildebrand says. But beyond all that, he thinks there's a cultural conversation America needs to have about the requirements on organizations that have the privilege of being excluded from taxes.

If citizens fully understood the issue, Hildebrand says, he thinks they would demand a clear and rigorously enforced standard. "I think we all want to say to a corporation, 'You're not paying any taxes. You're special. I don't want just everybody getting through — if you're going to try to get this, you should have to provide a lot of information, and we'll make sure that you continue to follow the rules,'" he says.

And, he notes, that discussion could well extend beyond politically active fours. Pittsburgh has been challenging health care giant UPMC's 501(c)(3) nonprofit status for a while now.

"If you're a hospital that says you're tax-exempt, what services are you doing that are different from the services that the for-profits do?" Hildebrand says, calling the issue one that has previously simmered. Similarly, he says, many large churches are now walking on a line of political speech.

"If you're talking to your congregations about the belief, everything's fine," he says. "When you then put money behind it and advocate for specific candidates, then you're crossing a line."

According to Jennifer Ross, chief information officer for the Pennsylvania Association of Nonprofit Organizations, PANO isn't taking a big stance on the issue other than making sure that the public understands that the fours are not the soup kitchens and homeless shelters that they get tax deductions for contributing to.

On the larger issue, Ross says, "Dialogue is probably a good idea, but it has to be in the right setting and handled the right way."

Ross is well placed to see the many ways in which large nonprofits such as health systems and insurers give back to the community, she says, and Pennsylvania has started having some of those broader conversations in reference to the public charity bill that passed the House and Senate this year. It would amend the state constitution to specify that the General Assembly, not the courts, has sole authority to determine what qualifies an organization as a purely public charity.

The measure must receive approval in two consecutive legislative sessions followed by the voters' approval in a public referendum.

Michael A. Sand is president of Susquehanna Township-based Sand Associates, which provides management consulting and training to nonprofit and government agencies. He calls the IRS proposal a welcome opportunity to state clearly which organizations are and should be tax exempt.

"These regulations will be helpful in guiding both the IRS and groups which legitimately would like to know whether they are eligible for tax-exempt status under section 501(c)(4) of the IRS code," he says.

At the Pennsylvania Department of State, Director of the Bureau of Charitable Organizations Michael Patterson says his department isn't hearing much about the IRS proposal.

"The camps appear to be split between agreeing with the additional proposed regulations and those that think they should be relaxed further," Patterson says.

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