A number of AIP members have asked us the difference between organizational pairs in the Charity Rating Guide such as Greenpeace and Greenpeace Fund, Public Citizen and Public Citizen Foundation, League of Women Voters of the U.S. and League of Women Voters Education Fund, etc....And why do their grades usually differ?

These organizational pairs conduct different programs but typically share staff, board members, office space and other resources. However, they must maintain legally distinct entities in order to avoid conflicting with Internal Revenue Service codes. Some charities would prefer that AIP not separately evaluate each organization in a pair and instead offer a combined evaluation of both entities. AIP provides separate listings because donors must write checks to a specific entity rather than a combined pair.

The IRS maintains complex rules to determine whether certain nonprofit lobbying activities can be funded with tax-deductible contributions. Nonprofits must closely monitor and control any involvement they may have in direct and grassroots lobbying and political activity.

Not all groups which solicit for good causes are eligible to receive tax-deductible contributions. Some which are not include political organizations, social welfare groups, labor unions, civic leagues and social or sports clubs. Only organizations organized and operated exclusively for charitable, educational, scientific or religious purposes can receive tax-deductible donations. These charities are labeled by the IRS as “501(C)(3)” or “C3” groups. With the exception of certain veteran's organizations, C3 groups generally can avoid IRS penalties, if they use no more than 5 to 20 percent of their “exempt purpose expenditures” (up to one million dollars) on direct lobbying. C3 grassroots lobbying, which attempts to influence public opinion on legislation, generally needs to stay below 25 percent of direct lobbying expenditures (up to $250,000) to avoid IRS penalties.

Social welfare groups and civic leagues are referred to by the IRS as “501(C)(4)” or “C4” groups. Such organizations pass up the privilege of accepting tax-deductible contributions for the opportunity to participate more in lobbying activities than their C3 counterparts. In addition, unlike the C3 groups, they are allowed to spend some of their funds to endorse or oppose candidates for political office.

What happens to C3 groups that participate in political campaigns? The IRS may take a bite out of then or even take away their C3 status. C3 organizations making political expenditures are required to pay penalties fees equal to 10 percent of the amount they spent wrongly with managers who approved the expenditures being penalized a fee equal to two and a half percent of the political expenditure. Americans United for Separation of Church and State (AU) announced recently that it plans to expose C3 churches that violate IRS codes by telling their congregates whom to vote for in the November 1996 elections. AU has already collected information on the 22,000-member Second Baptist Church in Houston that has in AU’s view “set up it own political operation to participate in the recent Texas presidential primary and other elections.”

Sometimes C3 groups form C4 groups and vice-versa. When C3 charities decide to become substantially involved in attempting to influence legislation, they risk losing their tax-deductible contributions. To keep this from happening, they may form a separate C4 organization that raises non-tax-deductible contributions which can be used for lobbying. Another common scenario is that a C4 group which wants to start conducting educational or scientific programs will set up a C3 group as a tax-deductible vehicle for its donors.

C4 groups usually receive lower AIP grades than their C3 cousins because C4’s tend to have higher fund-raising costs. The reason for this is that C4 groups often incur more of the costs of acquiring new or first-time donors. After the donor is hooked by the C4, he is later solicited by the C3 at a substantially lower cost. Also, it is more difficult to raise funds that are not tax-deductible. Many foundations and wealthy donors limit their giving to C3 groups. In addition, C4 groups often take highly controversial positions that greatly limit the universe of people that are willing to support them whereas the educational, scientific, or social service activities of C3 groups are generally appealing to far more potential donors.

Can you tell by the name alone which entity is the C3 and which is the C4? Not in all cases, but typically the names used by the C4’s will be briefer and usually end with “Action (Fund or League)”; the names of the C3’s will usually end with “Foundation” or “Education (Fund or Trust).” Also, groups with names that end with “Legal Defense Fund” are usually C3’s. These groups may or may not have any current overlap with the similarly named organization. For example, the NAACP Legal Defense Fund, which separated nearly 40 years ago from the NAACP, has considered changing its name because of public confusion over its identity as a separate and distinct organization.

In the June 1996 issue of the Charity Rating Guide and Watchdog Report we added the C3 or education arm of three of the C4 groups in the ABORTION & FAMILY PLANNING category. C3’s and C4’s in the same pair may vary greatly in size. For example, the fiscal 1994 budget of the National Abortion and Reproductive Rights Action League, a C4, was $3.9 million yet its related C3 Foundation’s budget for the same time period was over twice as small at 1.5 million. As a general rule, if there is a C3 and C4 organization and AIP does not evaluate both of them, AIP will report the larger one.