Requirements Dictated by TU’s 501(c)3

TU’s 501(c)(3) status, or tax-exempt status as a public charity, is one of TU’s most important assets. This status allows donors to deduct their charitable contributions to your chapter or council, to the extent allowed by law and provides us with several other benefits. The IRS determines whether a nonprofit organization is tax-exempt under Section 501(c)(3) of the Internal Revenue Code—it is separate from being a not-for-profit/nonprofit/non-stock corporation. A general primer on IRS rules that 501(c)(3) organizations must be aware of can be found here.  

Trout Unlimited’s tax-exempt status is unique because it has a “group exemption.” In this situation, chapters and councils of TU come under the umbrella of TU national’s 501(c)(3) status as they’re considered “subordinate organizations.” This is why chapters and councils report their financial status to national each year and use the same fiscal year as national. To maintain this status, you should be sure to report any change in your status (such as incorporating or a new Employer Identification Number) to Volunteer Operations staff promptly. 

There are critical requirements to maintaining 501(c)(3) status:

1. Chapters or councils may not endorse or oppose any candidate for public office:

The Main Points (further explained below)

• We cannot support or oppose candidates for elective office.
• Be cautious of how your personal statements might be construed to be that of TU.
• Consider alternative ways of highlighting the importance of cold water conservation.

TU cannot endorse or oppose any candidates for elective office, nor can TU use its funds or any other of its resources (e.g., phones, computers, offices) to support or oppose candidates for elected political office.  The federal rule applies to the national organization, councils, chapters, and to staff and volunteers acting on behalf of or in the name of TU.  

While there are a variety of ways 501(c)(3) organizations can play neutral, non-partisan roles in the electoral process, failure to comply with these narrowly defined restraints could endanger TU’s tax-exempt status, and therefore the financial foundation of our organization.  

Trout Unlimited’s tax-exempt status is a critical asset that the Board of Trustees, staff, and volunteers are duty-bound to safeguard at all costs. Because the penalties are so serious, we want to act with an abundance of caution when dealing with candidates for office by detailing prohibited activity and strongly encouraging you to consult with TU staff before considering electoral activity authorized for tax-exempt organizations. 

In addition to complying with the prohibition against use of TU funds and resources for political campaign contributions or intervention, all TU volunteer leaders and staff must refrain from making any statement that has the effect of endorsing or opposing a candidate for elected political office in TU’s name. In addition to the obvious examples (“TU endorses Candidate A” or “TU opposes Candidate B”), please bear in mind that anything you say publicly in your capacity as a TU leader or staff regarding how you or someone else should or even might vote for or against a candidate for elected political office (“I, the President of a chapter of TU, voted Egalitarian in the last elections, but I’m voting for the Contrarian Party this time” or “You may have voted Contrarian last time, but as President of a TU chapter I think you should vote Green this time”) could be construed as a TU endorsement or statement in opposition. Even if you are careful to say that you are voicing a personal opinion and not speaking on behalf of TU, in the heat of a political campaign season, any such public statement of support or opposition may be construed as a statement by or on behalf of TU. 

The above obviously places some limits on the free speech of TU volunteer leaders and staff, but it does not affect such private activity as making campaign contributions of personal funds or non-public statements of support or opposition to candidates for elected political office, or (obviously) casting your vote. Nor does it prohibit you in your private, non-TU capacity, from participating in election-related canvassing or other activities or hosting or attending fundraising events for candidates for elected office, but you must be careful not to use any TU mailing lists or other resources in connection with any such activity or event and must (obviously) observe the other precautions and prohibitions described here. 

TU will continue to engage in advocacy efforts in pursuit of its mission, and doing so will at times include communication regarding legislators’ positions on issues on which TU has long been working.  Such communication must be handled in a way that is consistent with IRS rules for 501(c)(3) nonprofits (see IRS Guidance on Campaign Intervention).  

There are numerous ways to engage legislators and candidates that, if done correctly, are well within the IRS rules, such as candidate forums, questionnaires, and issue-oriented presentations to candidates and their staffs provided TU representatives treat each candidate with equal consideration, do not pass judgment on their positions and are in accord with TU’s mission.  

Please consider engaging in these activities in order to advance TU’s mission, but err on the side of caution, and contact Volunteer Operations staff before engaging in any kind of activity that could be construed as attempting to influence an election. 

2.  Chapters or councils must strictly account for the portion of its activities devoted to lobbying:

The Main Points (further explained below)

• The definition of “lobbying” is relatively narrow – many advocacy activities you engage in may not be “true” lobbying. Review guidance to be determine whether the activity constitutes lobbying.
• Have a process for tracking lobbying-related expenditures and activities.
• Restrict lobbying to five percent or less of annual gross receipts.

The IRS defines “lobbying” very narrowly. There are two primary types of lobbying: direct lobbying and grassroots lobbying. Direct lobbying is the act of asking (such as through a letter or direct communication) an elected official or their staff to take action on a piece of legislation, such as voting for, against, or cosponsoring a bill.  

Legislation is generally considered to be action by Congress, state legislatures, local councils, or similar governing bodies, or actions taken by the public via referendum, ballot initiative, constitutional amendment, or the like. IRS guidance on the definition of lobbying can also be found here.   

Grassroots lobbying involves urging the public to contact members of a legislative body for the purpose of supporting or opposing legislation or engaging in a public campaign for ballot initiatives or referenda. 

In the case of either direct or grassroots lobbying, IRS rules require that a tax-exempt organization not devote a substantial part of its expenditures to lobbying. Chapters should restrict lobbying expenditures to no more than five percent (5%) of their annual budgets and refrain from any lobbying altogether unless there are well established accounting procedures for tracking expenditures and maintaining them at or below five percent. Chapters must be particularly mindful when accounting for lobbying-related expenditures and retaining related records.  

Controls are in place at the national level and applied to expenditures for activities such as congressional testimony, the Grassroots Activist Network, and direct mail appeals. Chapters and councils generally do not have such controls in place, and thus must exercise caution when it comes to lobbying. Additionally, no council or chapter should employ or retain the services of a lobbyist unless it files a 990 return with the IRS and is able to demonstrate in the filed return that its expenditures, in connection with the lobbyist, as well as any other lobbying expenditures, are collectively less than five percent of its total annual expenditures. If you have any further questions, are concerned about your chapter or council’s activities, or want to engage in lobbying activities, contact TU’s Volunteer Operations or legal staff .   

3.  Chapters or councils cannot donate money to a non-501(c)(3) organization or a 501(c)(3) organization that does not further TU’s mission:

The Main Points (further explained below)

• Do not donate money to non-501(c)(3) organizations or non-501(c)(1) organizations.
• Donations to permissible organizations must further TU’s tax-exempt purposes.
• Do not donate money to individuals or individual causes, such as supporting lawsuits.

TU (including its chapters and councils) can only donate money to other entities if doing so furthers our tax-exempt purposes (in other words, our mission broadly defined or interpreted) and only if that entity itself is exempt under section 501(c)(3) or a governmental entity organized under section 501(c)(1). If your chapter or council wants to make a donation to another nonprofit, you must obtain confirmation that the organization has section 501(c)(3) status by obtaining a copy of the organization’s IRS determination letter. If the organization does not have a determination letter and the donation would further our tax-exempt purposes, you should consider partnering with the other organization on the project and directly pay for specific goods and/or services associated with the project.  

For example, a TU chapter could donate money to a local watershed council for a stream restoration project if the project were consistent with our tax-exempt purposes and the watershed council had a 501(c)(3) or 501(c)(1) exemption. Another example is the practice of giving money to the well-known “Casting for Recovery” program. Fly fishing is frequently used as a recruiting tool to support our conservation mission. So, supporting Casting for Recovery or a similar organization can be categorized as an acceptable fundraising expenditure.  

However, if the watershed council in the above example did not have 501(c)(3) or 501(c)(1) status with the IRS, this donation would likely violate IRS rules. This is because the funds given to the chapter are eligible for an income tax deduction by TU donors, but if the funds were given directly by the donor to the watershed council, the donor would not be able to take a deduction. In a slightly different example, TU could not donate funds to the local hospital for a new treatment center even though the hospital is a 501(c)(3), because medical treatment is not part of TU’s stated exempt purpose. If this situation occurs, reach out to Volunteer Operations, legal or compliance staff for further guidance.  

Similarly, TU cannot pay for an individual’s legal fees in association with a lawsuit, unless TU itself is a party to the lawsuit with few exceptions. For example, if a local individual brought a lawsuit trying to stop pollution of a local trout stream, TU could not pay that person’s legal fees. The IRS would view doing so as using tax-exempt donations to benefit an individual, even if the lawsuit is consistent with TU’s exempt purpose. This especially holds true if the trout stream is adjacent to the individual’s property. 

It is perfectly acceptable, however, for TU chapters to pay entities that are not tax exempt for services rendered so long as the expenditure corresponds to TU’s exempt purpose. For example, TU can pay contractors for work done on stream restoration projects. In the stream restoration example given above, the TU chapter could comply with IRS rules by partnering with the watershed council on the project and directly paying for specific goods or services associated with the project. A TU chapter could also pay a lawyer for representing TU in a lawsuit challenging pollution in a local trout stream provided the chapter has complied with TU’s Litigation Policy. 

Chapters and councils should also contact TU’s Volunteer Operations or legal staff with any questions or uncertainty about any donation you wish to make. 

4.  Chapters or councils should use great caution if they choose to grant scholarships to individuals:

The Main Points (further explained below)

• Establish objective, non-discriminatory criteria related to TU’s tax-exempt purposes.
• Ensure that persons who are related to applicants are not involved in award decisions.
• Retain records related to applicants, the criteria and purpose of the program, the selection process, and awardee information.

While 501(c)(3) organizations (TU, its chapters and councils) are permitted by the IRS to grant scholarships that further the charitable purpose of the organization, the IRS has strict and complex rules for governing the process of granting and reporting on scholarships. If your chapter or council would like to pursue giving scholarships to individuals where the chapter or council in question would be selecting those individuals itself, you must be aware of and comply with the following: 

• Establish Eligibility Criteria: Eligibility criteria should be clear and specific to the scholarship and may include academic, extracurricular, or other requirements. Grants to individuals are not permitted unless there is a “charitable class” of potential recipients. This requires that the group of persons that can benefit must be either a large enough or an indefinite class. For example, giving scholarships to the board of directors’ children or grandchildren would not meet this definition of charitable class due to its limited size. A scholarship fund cannot be established or operated to assist particular, pre-selected individuals from a limited population.
  
• Award Selection: Establish a selection process for determining whom to award the scholarship. Awards must be made according to a procedure that results in performance by recipients of the activities that the awards are intended to finance. The organization should obtain reports from the recipients to determine whether they have performed the intended activities. This could come from the recipient themselves, or in the most prevalent case, from the institution of higher education where the scholarship funds are sent to be awarded to a specifically named scholarship recipient who received the award. An award to an individual can only be renewed if the organization has information that the initial award was applied to the intended purposes.  
  
  The selection process should be as objective as possible, based upon the eligibility criteria and scholarship purpose, and not discriminate on the basis of any protected characteristic. No member of the selection committee, nor their family members, can benefit in any way from choosing the scholarship recipients. The organization must also ensure that any non-U.S. citizen who receives a scholarship is not on a published “Specifically Designated Nationals” terrorism watch list.
  
• Documentation of the Process: You must maintain detailed records of the scholarship program including the purpose of the scholarship, amount of the scholarship, eligibility criteria, selection process, applicant and recipient information, who was involved in the selection process, and the like. This information will be helpful when reporting a scholarship on your 990. 

Because every situation is unique, and because granting scholarships is a complex undertaking with many potential risks, it is required that you seek approval from TU’s General Counsel or TU’s Volunteer Governance and Reporting Manager prior to granting scholarships.  

There are other, less burdensome options your chapter or council might consider if you’d like to provide funds to individuals to use towards their education such as providing funds to a college or university and allowing them to choose the recipient. Or, you might consider a fellowship grant, which differs from a scholarship. Finally, you might also consider a program that allows funds to be disbursed to individuals to attend summer youth camps, educational conferences, or the like—these are usually not considered to be “true” scholarships, even though they are often marketed as such. If you’d like more information on alternative options, reach out to Volunteer Operations staff or contact an attorney with expertise in this area.  

5.  Chapters and councils must refrain from improperly entering into transactions which may constitute a “conflict of interest.”

The Main Points (further explained below)

• Ensure your chapter or council has established and follows a Conflict of Interest policy.
• Board members must disclose covered interests if the chapter or council contemplates a transaction which would implicate that interest.
• COI transactions at or below fair market value are likely permissible; if above fair market value, probably not.

The IRS has conflict of interest rules, rooted in the prohibition against private benefit and private inurement, that apply to all tax-exempt organizations, including 501(c)(3) organizations, as well as their chapters and councils.  These rules aim to prevent insider transactions that would financially benefit individuals with close ties to the organization at the expense of its tax-exempt purpose. 

Under these rules, a conflict of interest may occur when a transaction between a tax-exempt organization and a “disqualified person” is contemplated. A disqualified person includes anyone who is in a position to exercise substantial influence over the organization’s affairs, such as officers, directors, and key employees, as well as their family members and entities in which they have an ownership interest. 

To comply with the IRS conflict of interest rules, the organization must:

1. Establish a written conflict of interest policy outlining procedures for identifying and addressing conflicts of interest. A sample Conflict of Interest policy can be found in Appendix A of the Instructions to Form 1023 (Do NOT complete or submit Form 1023 for any reason, though). In addition, TU has provided a sample Conflict of Interest Policy for Chapters and Councils here.
2. Require all officers, directors, and key employees to disclose any financial interest they or their family members have in a transaction involving the organization.
3. Ensure that the transaction is fair, reasonable, and in the best interest of the organization. This involves determining the “fair market value” of the transaction which might require obtaining quotes/estimates from other vendors, engaging an appraiser, or the like.
4. Document the decision-making process, including the basis for the decision, alternatives considered, and dissenting opinions. If a transaction with a disqualified person is at or below fair market value, it is likely permissible. If such transaction is above fair market value, it is likely impermissible and could expose the organization to excise tax liability.
5. Ensure that the transaction is approved by individuals who have no financial interest in the transaction and are not related to anyone who does. Disqualified persons must recuse themselves from the discussion of the transaction and the vote on whether to approve but may answer other directors’ or officers’ questions related to the transaction if needed.

If the organization follows these procedures and ensures that the transaction is fair and reasonable, it may still approve the transaction, even if it might constitute a conflict of interest. 

However, if the IRS determines that the organization did not follow these procedures or that the transaction was not in the organization’s best interest, it may revoke the organization’s tax-exempt status or impose penalties on individuals involved in the transaction. These penalties are severe, ranging from 25-200 percent of the transaction value. 

Therefore, it is crucial for 501(c)(3) organizations to establish and follow a conflict of interest policy and to document all transactions involving disqualified persons to ensure compliance with IRS rules.