Updated Branch Tax Status Briefing*

AAUW Current Topics Briefing #19
February 17, 2008
Revised March 2, 2009
Revised June 15, 2009

On July 1, 2007, delegates to the AAUW Biennial Convention in Phoenix, AZ, voted unanimously to approve sweeping changes to AAUW's organizational structures. The vote signaled the Boards of Directors to move forward with strategic initiatives to help create a viable and sustainable 21st century organization. As a result of the restructuring vote, the Association (AAUW) and the AAUW Educational Foundation (EF) are to combine many of their assets and activities to form a streamlined, mission-driven organization with a single set of elected officers. This restructuring is moving forward and, at the June 2009 AAUW Convention in St. Louis, will culminate in a vote on the Bylaws for the restructured entity.

The Restructuring

Current Structure
The Association (the membership organization) is tax-exempt under IRS Section 501(c)(4), making it a "public" or "social welfare" organization.

• Contributions to it are not deductible;
• It can engage in unlimited "lobbying;" and
• It is subject to restrictions on "political activities."

AAUW branches are tax-exempt under IRS Section 501(c)(4) and, accordingly, are subject to the same rules.

The Educational Foundation (EF) is tax-exempt under IRS Section 501(c)(3), making it a "public charity."

• Contributions to it are generally deductible as charitable donations;
• The ability of EF to lobby is limited; and
• It can engage in absolutely no political campaign activities.

Although the Association is a Section 501(c)(4) organization, most of its activities would be appropriate for a Section 501(c)(3) organization. It is not unusual for charitable activities to be conducted by non-charitable tax-exempt organizations, such as social welfare organizations that qualify under Section 501(c)(4).

The Association's non-charitable activities include a limited amount of lobbying and the periodic publication of a "voter guide."

At the present time, the Association is the "central organization," and the branches are the "subordinate organizations" with respect to a "group tax exemption" for federal income tax purposes. Although the Association and the branches constitute a "group" for exemption purposes, the organizations have never chosen to file a "group tax return."

After Restructuring
Once restructuring takes effect in June of 2009, the "new" organization will be known as AAUW. AAUW will control both: (a) the Section 501(c)(3) "public charity," which will be the dominant organization, and (b) the Section 501 (c)(4) "public" or "social welfare" organization with limited activities related to lobbying and "Get Out the Vote" initiatives.

After restructuring, donations to the national AAUW Section 501(c)(3) public charity will be tax deductible, but donations to the national AAUW Section 501(c)(4) public welfare organization to be called the "AAUW Action Fund" (that supports our Lobby Corps and election-related activities) will continue not to be deductible. Beginning April 1, 2009, AAUW national dues will be $49.00, of which $46.00 will be tax deductible by the individual member; $3.00 of that national dues payment will not be tax deductible because it will be used to support the AAUW Action Fund's Section 501(c)(4) activities (Lobby Corps and election-related activities). Likewise, of the $17.00 Student Affiliate dues, $16.00 will be tax deductible and $1.00 will not be tax deductible for the same reason.

Tax deductible funds (national dues and contributions) may be processed through branch checking accounts. That these funds are collected by the branch is immaterial to their deductibility, as the intent of the payer and the destination of the payment controls the tax deductibility of the payment when the recipient is a 501 (c)(3) organization.

Effect of Restructuring on the Status of Branches
Because restructuring will result in the Section 501(c)(3) becoming the dominant organization, questions have arisen as to whether each of the AAUW branches must or should (a) become a subordinate organization of the Section 501(c)(3) in the context of a group exemption and/or (b) convert from Section 501(c)(4) status to Section 501(c)(3) status.

Branches become subordinate organizations of the Section 501(c)(3) in the context of a group exemption.

• After AAUW's restructuring, the Section 501(c)(3) organization will be the dominant national organization — the central organization. Most branches (and states) will likely wish to continue to be involved in a group exemption under the "new" AAUW.
• In order to be covered by the restructured AAUW’s group tax exemption, the IRS requires AAUW to maintain on file a current authorization letter from each branch (and state) organization that chooses to be covered by the Section 501(c)(3) organization's group exemption.
• Each branch (and state) president will receive a form, which must be provided to AAUW and giving up-to-date information about your organization, including the name, mailing address, actual address if different, and IF you have employees, your EIN or federal tax identification number. In order to retain your tax-exempt status under the AAUW group exemption, the IRS requires AAUW to maintain a current, accurate a copy of this form, the AAUW Group Exemption Authorization Letter, for each covered branch. This data must be submitted each year to the IRS in order for AAUW to retain the ability to provide the group tax exemption.
• In conjunction with this, the covered branch will receive a new affiliation agreement that verifies affiliation with the restructured 501(c)(3) AAUW and affirms eligibility for the AAUW group exemption.
• Submitting the AAUW Group Exemption Authorization Letter has no bearing on branch (state) tax status. If the branch is a 501(c)(4) entity now, it will continue to be one in the future, unless you go to all the effort and considerable expense of changing your status with the IRS and submitting to them the required annual paperwork. Likewise, if the branch (state) is a (c)(3) entity now, nothing will change for it either — unless, of course, you do not return the completed AAUW Group Exemption Authorization Letter authorizing AAUW to cover your branch (state) in the group tax exemption.

Conversion from 501(c)(3) status to 501(c)(4) status is neither needed nor warranted.

• Since a Section 501(c)(3) organization can be the central organization with respect to a group of Section 501(c)(4) organizations, the group exemption can continue without branches needing to convert to Section 501(c)(3) status.
• To convert to Section 501(c)(3) status, each branch would need to amend its own organizing documents to provide for a charitable purpose and the correct liquidation provisions. Because there are more than 1,000 branches, this would necessitate a substantial amount of legal fees and involvement with lawyers in all 50 states. Even if the legal costs and filing fees averaged no more than $5,000 for each branch, more than $6,500,000 would be required. And $5,000 per branch might not be sufficient. Establishing 501(c)(3) status is complex and expensive, and maintaining it requires considerable record-keeping, monitoring, and reporting. Note: If a branch decides to convert to Section 501(c)(3) status, that branch is responsible for the costs of conversion.
• If converted from Section 501(c)(4) status to Sections 501(c)(3) status, some of the smaller branches would become private foundations rather than public charities because they have too few donor-members to qualify as a public charity (roughly 50 to 100 donor-members are needed to qualify). But, private foundations are ineligible to be subordinate organizations with respect to a group exemption. In some cases, a smaller branch that would otherwise be an ineligible private foundation might be able to become a supporting organization of the Section 501(c)(3) or 501(c)(4) and therefore qualify as a public charity. But this conversion would be an expensive, tedious, and clumsy process.
• Individual branches that are interested in the benefits of charitable status under Section 501(c)(3) can selectively convert to public charity status without affecting the other branches. In addition, some branches may be best served by keeping their Section 501(c)(4) status and creating a new affiliated "local charitable branch" that is controlled by the local branch. A pre-existing local branch and a new local charitable branch can themselves constitute a "complex structure" on the local level, echoing the complex structure of AAUW on the national level. Moreover, local charitable branches can become part of a new group exemption for Section 501(c)(3) organizations, with either the Section 501(c)(3) or the Section 501(c)(4) as the central organization. These decisions are options at the local level, but would entail considerable effort and expense to the local branch.

Effect of Restructuring on Tax Deductibility of Dues and Donations
Since most branches will continue to be involved in the Section 501(c)(4) group exemption after restructuring, nothing will change regarding the tax deductibility of individual donations or dues payments to these branches. In order for branch dues or donations to be tax deductible to the individual making the payment, the branch must convert to Section 501(c)(3) status.

After restructuring, donations to the national AAUW Section 501(c)(3) public charity will be tax deductible, but donations to the national AAUW Section 501(c)(4) public welfare organization to be called the "AAUW Action Fund" (that supports our Lobby Corps and election-related activities) will continue not to be deductible. Beginning April 1, 2009, AAUW national dues will be $49.00, of which $46.00 will be tax deductible by the individual member; $3.00 of that national dues payment not be tax deductible because it will be used to support the AAUW Action Fund's Section 501(c)(4) activities (Lobby Corps and election-related activities).

Conclusion
Although the restructuring will not be highly visible to the outside world, it will be an important change in the structure and operations of our organization. Once the new AAUW Bylaws are approved by our members in June 2009, our central organization will be the Section 501(c)(3) public charity part of AAUW. A small Section 501(c)(4) public welfare organization will be retained for aspects of our public policy and government relations work. The changes will not necessitate major changes for AAUW branches and will have no bearing on the tax-exempt status of AAUW branches. All that will be necessary for branches to be covered by the AAUW group tax exemption is to fill out the form sent to them by AAUW indicating their desire to remain covered and to keep the information up to date.  

Any change in tax-exempt status desired by an AAUW branch must be undertaken by that branch, with the associated paperwork, costs and legal fees also undertaken by that branch. It is anticipated that most branches will not make the decision to change to the Section 501(c)(3) status and will continue in their current Section 501(c)(4) status for the foreseeable future – a decision that they may change at any future time.

*Note: The IRS term for branches and states is "Sub-Units." The information in this briefing applies to both.

This updated briefing is the nineteenth in our AAUW Current Topics Briefing Series issued by Linda Hallman, CAE, Executive Director.