state arts action network

SAAN Professional Development Conference Call Notes

Wednesday, February 15, 2006 

4:00–5:00 p.m. (EST)

Topic:  501(c)(3) and 501(c)(4) Organizations

Speakers:

Lindy Lewis, Business Manager, Illinois Arts Alliance/Foundation

Lisle Soukup, Executive Director, Arizona Citizens for the Arts/Arizona Action for the Arts

Illinois Arts Alliance is in the final stages of making their 501(c)(4) dormant.

Arizona recently expanded from only a 501(c)(3) into both a 501(c)(3) and a 501(c)(4)

Jay Dick of Americans for the Arts welcomed attendees to the call.

Sheila Smith, the Programs Committee Chair, welcomed the attendees and stated that she loves these conference call meetings because you do not have to spend $1,000 to attend in person.  They allow people to participate and to learn more about the topic while taking minimal time out of their schedule.

She continued that this topic was chosen because there seems to be some confusion on what an organization can do with regards to advocacy.  Some SAAN members only have a 501(c)(3), some only have a 501(c)(4) and some have both.  There has been a trend for member organizations to move from one form to another.  This conference call will address those trends and provide a forum for people to ask questions.

Sheila introduced the first speaker, Lindy Lewis, Business Manager, Illinois Arts Alliance/Foundation.

Lindy:  They are in the final process of making their 501(c)(4) dormant.  They currently have a 501(c)(3) and a 501(c)(4) until their new fiscal year starts on July 1st.   The Illinois Arts Alliance/Foundation celebrates their 25th anniversary this year. Since its founding, the organization has significantly increased program services, thus decreasing its percentage of lobbying expenditures. Their Audit Committee suggested in an effort to gain efficiencies that the board consider consolidating the two organizations.   The IRS clarified lobbying spending under section 501(h) in 1990.  In FY2005, they took the IRS 501(h) election.  The only other alternative to taking the 501(h) election is to follow the IRS guidelines stating that 501(c)(3) organizations can not do a “substantial” amount of lobbying, but the IRS has never defined “substantial”.  This has left 501 (c)(3) organizations left to guess; thus, the Illinois Arts Alliance Foundation took the 501(h) election to say there is clear language outlining allowable limits of direct and grassroots lobbying.

Jay’s Note:  To read about the 501(h) election, click here:   http://www.npccny.org/info/adv1.htm. 

To claim the H election, you have to fill out Form 5768.   See this link for the IRS form:  http://www.irs.gov/pub/irs-pdf/f5768.pdf

Lindy: They have found ways to make lobbying more efficient.  For example, Capwiz, e-advocacy, saves postage, staff time, etc.  Looking closely at the activities, the bulk of the work is in education, rather than in direct and grassroots lobbying.

Lindy included her Auditors letter.  In it they outline pros and cons and actionable items of merging their 501(c)(3) and 501(c)(4). 

They had to give a hard look at what expenses are to make sure they were within 501(h) election limits.  To do this, they track their time in two week increments.   From this data they were able to determine that they would be well within the allowable limits.

Some of the pros to consolidating are:

Cost savings –They no longer need two letter heads.
They will only need to prepare and file one Form 990
(http://www.irs.gov/pub/irs-pdf/f990.pdf)

Time savings –

The accounting will no longer require the complication of keeping the two entities separate.
This will save time for the board of directors by eliminating the need of the second board meeting.
Elimination of name confusion between Illinois Arts Alliance and Illinois Arts Alliance Foundation.

Membership dues will become tax deductible. 

They called large organizations such as the National Center on Poverty Law and the Wilderness Society and found that they operate as 501(c)(3) organizations with the 501(h) election. 

Their 501(c)(4) will become dormant in case regulations should change in the future.

This process has fit in with their strategic planning, branding, and the upcoming 25th Anniversary.

To successfully perform their time intensive process it was necessary for the board of directors to have close communication with the auditors and to draw on other professional resources such as attorneys.

Questions: 

Jay: The Illinois Arts Alliance/Foundation is a rather large organization compared to other arts groups, and thus you have a larger budget.  Do you think that consolidation is right for all groups?

Lindy:  It would not be right for everyone. 

You really need to know the definition of direct lobbying and grassroots and keep track.

Lisle: Direct lobbying definition:  This has to deal with a call out to a specific legislator on a specific issue/piece of legislation asking them to vote in a certain way.

Indirect Lobbying or Grassroots Activity:  This is a general call to action asking for general support or opposition. 

(For more information, on the definition of direct lobbying versus grassroots, please go to:  http://www.peacefund.org/grant/docs/2005_Lobbying.doc)

Andrea:  Part of distinction is whether you, as a part of the staff, are talking directly to the legislator versus asking your members to talk to your legislator.

Pamela:  Grassroots Advocacy is activating the field; you do not tell them what to specifically say.

Ellen:  Lobbying deals with an up or down vote.

Lindy:  The Alliance for Justice’s attachment has very clear definitions of direct and grassroots lobbying, and I believe that as long as you are talking with your members it is direct lobbying, not grassroots lobbying. (Under the 501(h) election, the allowable expenses for direct lobbying are much greater than grassroots lobbying.) 

Tommy: They have been talking about going from a 501(c)(3) to a 501(c)(3) and 501(c)(4).  Their lawyers said to do both.  He will get his lawyer's rationale and send it to the group.

Ann Marie:  She is interested in knowing what tool Lindy uses how you monitor staff time?

Lindy:  She uses a self-created spreadsheet that lists all of their programs with all grants, administration, fundraising, legislative activities, etc., and the staff lists how much is direct or grassroots.  She will share this with the SAAN.

Lindy:  At the end of the year they use that form to allocate all expenses and know total expenses for all programs.

Before they really kept track, they used to guess at the end of the year how much time they spent on activities. 

For example, for their Arts Alliance, 25% was the guess.  It was actually 11% and 17%, depending on the year.

Betty:  Groups have to be careful not to overestimate.  When you spend a lot of your efforts on research and tracking, etc. is this considered lobbying or education?

Tracking takes the guess work out.

Sheila introduced the next speaker – Lisle Soukup, Executive Director, Arizona Citizens for the Arts/Arizona Action for the Arts

Lisle:  They recently expanded from a 501(c)(3) to a 501(c)(3) and a 501(c)(4).  Their decision came as an attempt to address changes in climate in their organization and within their state.

Background: Their organization is 25 years old.  Of the 25 years, the organization was run for 15 by one individual who was politically connected and very savvy.  As a result, the board became less politically involved and relied more and more on the Executive Director.  Also, during this time, the State legislature became more partisan.  

So, they needed to hire a lobbyist to make up for these facts.

Simultaneously, their organization, rather than exist solely to get public funding for their arts agency, reviewed their mission and made it broader so to also influence public policy to make the arts flourish in Arizona.

For example, if you do not have adequate public transportation, then people can’t get to the theater, so it is an arts issue.

They developed strategic alliances with cultural tourism organizations, education organizations, etc., so everyone will be stronger.

Their concern on the 501(c)(4) was not the 20% rule as they do the 501(h) election.   They have two staff, a contract lobbyist and a $300,000 budget. Only $25,000 comes from membership, everything else is from a major fundraiser, the Governors Arts Fundraiser.  They needed to keep that dinner tax deductible, so they had to keep the 501(c)(3).

But in terms of broader public policy they felt that they needed to get involved in elections and they needed a 501(c)(4) for that.  They wanted to be able to endorse candidates, issue report cards, etc.   They didn’t want to wait for candidates to get into office before they started to lobby them an educate them on their issues, but to recruit and endorse arts friendly candidates from the start.

There are problems with book keeping and their timesheets   The 501(c)(4) reimburses the 501(c)(3) on a monthly basis.  Their membership dollars are growing, as members wanted them to be more political.  This is true lobbying for them.  

It has been a challenge during the first legislative session as a 501(c)(4).  Where are you going to spend your time and efforts?  You must pick out the big issues and not the small ones.

It is not easy and they are still figuring out the challenges, but their members are very pleased that they have made this move.

Trish P:  She has been the Executive Director for two years.  They are a 501(c)(4) and a have a new 501(c)(3).  They have only had both organizations for a year.  With two organizations, how do you handle the boards?  Do you have one or two boards?

Lisle:  She has two board presidents, two treasures and two secretary; all the other members are the same.  But, they keep separate minutes, records and have separate board meetings.  She hopes to eventually have more differences on the boards, but it is hard to find more people.

Trish:  Your officers overlap both organizations?

Lisle:  The Board Presidents, Treasures and Secretary are different, but all are board members of both organizations.

Trish:  Her challenge is that one organization handles everything, there are separate functions, but the primary organization feels ownership of the 501(c)(3) and that has brought problems.  They are looking to have identical officers for both organizations, but different boards.

Lisle:  She has been lucky – one board president who is aggressive – with the other being passive.

Tommy:  Their 501(c)(4) only has a President, Treasurer and Secretary.  They are expecting more information from IRS and will get to Jay who will distribute it to the SAAN.

Pamela:  They have the exact same board – but convene different board meetings, track staff time, etc.   With two staff people it is more of an administrative burden.  Their Finance Committee is looking at operating under 501(c)(3) and billing for 501(c)(4) programs.  They began as a 501(c)(4) and then added a 501(c)(3).

Ann Marie:  They started with 501(c)(4) and added 501(c)(3) in 1995.  Their bylaws were modeled after Illinois’ bylaws.  Their audit is merged, but separate 990s.

Lindy:  They have the same board for both organizations.

Trish:  Does anyone have existing bylaws with 501(c)(3) and 501(c)(4) organizations that specify how they elect officers?

Lindy: Their bylaws do not address this.

No one volunteered that their bylaws covered this.

Sheila:  Any issues or unanswered questions?

A question was asked, whether anyone has a sample management contract.

Trish:  They have one and will send it to Jay who will post and distribute it to the SAAN.

Ann Marie:  Is there any closer scrutiny with joint audits?  Are there any other types of documentation that accountants might be looking for?

Lindy:  No, but you have to make sure that you document all of your time and programs.

Lobbyist expenditure will be under the 501(h) election.

Pamela:  She is their lobbyist so that complicates things. 

Question:  She feels that she has never fully maximized their 501(c)(4).  In Arizona, what has been the impact on endorsing a candidate, etc.?

Lisle:  Her gut reaction is that it has helped, but it is too new to tell.  The first election year will be next fall.  They have not yet been able to endorse any candidates yet as they are too new.  But, they will be endorsing a bond issue.  The recipients of the bond have been grateful.  These organizations have used their 501(c)(4) for postage, etc.  But, they changed their name with the addition of the 501(c)(4), and this has been confusing.

Ann Marie:  Does anyone have a PAC under their 501(c)(4)?  

No, other than Americans for the Arts. 

Ann Marie’s board doesn’t want to give up the 501(c)(4) in case they form a PAC.

Sheila:  They only have a 501(c)(4).  She hopes that this call has productive and useful for SAAN members.  Thanks again to Lindy and Lisle for taking time to be the speakers.