501 (c)(3) Non-Profit Corporations
A tax-exempt foundation serves as an excellent platform for advancing activities that benefit the public good. Public charities offer individuals and groups a transparent structure that provides substantial tax advantages for both the organization and its donors. Nonprofit organizations qualify for tax exemption as long as their purposes are dedicated to serving the public interest and they refrain from engaging in prohibited activities, such as excessive lobbying or political campaigning.
Tax-exempt organizations are not required to pay federal income taxes on revenue tied to their charitable purposes, which may include proceeds from fundraising, grants from government or private entities, and income generated through the delivery of services. Similarly, individuals and businesses that donate to these nonprofits can benefit from tax deductions, creating a mutually beneficial system that supports the greater good.
Purposes of a Tax-Exempt Entity
Organizations that qualify for tax-exempt status under IRC Section 501(c)(3), including public charities and educational institutions, engage in a wide variety of activities, all unified by their focus on serving the public good. These activities encompass efforts such as fostering social welfare through programs for individuals with disabilities or foster care agencies, protecting the environment, providing healthcare, feeding and sheltering the homeless, and promoting culture and the arts. These programs, services, and initiatives reflect the overarching goal of advancing the public interest.
Under the Internal Revenue Code, a nonprofit can be established to obtain 501(c)(3) tax-exempt status for the following purposes:
- Charitable
- Educational
- Scientific
- Religious
- Testing for Public Safety
- Literary
- Fostering Amateur Sports
- Preventing Cruelty to Children or Animals
Political Activities, Lobbying, and Propaganda are Prohibited
The Internal Revenue Code (IRC) imposes strict restrictions on the activities of tax-exempt organizations under Section 501(c)(3) to ensure they remain focused on their charitable, educational, religious, or other qualifying purposes. These organizations are expressly prohibited from engaging in activities that involve the promotion of propaganda, significant attempts to influence legislation, or direct or indirect participation in political campaigns for public office.
Carrying on of Propaganda
“Propaganda” in this context refers to the dissemination of information or material intended to influence public opinion or sway public perception on particular issues. While tax-exempt organizations may educate the public about social, cultural, or policy issues as part of their charitable mission, they must avoid any communication that could be construed as propaganda. This includes distributing biased materials or organizing activities that pressure individuals or groups to adopt a specific viewpoint, particularly when it is linked to legislative or political advocacy.
Attempting to Influence Legislation
Tax-exempt organizations are also limited in their ability to influence legislation at any level of government. The IRS defines lobbying as any activity aimed at persuading members of a legislative body to enact, modify, or oppose specific laws. Organizations under 501(c)(3) may engage in some lobbying, but it must constitute an “insubstantial” part of their overall activities, typically measured by expenditure limits or time spent. Excessive lobbying can jeopardize an organization’s tax-exempt status.
To avoid breaching these restrictions, organizations may elect to follow the 501(h) expenditure test, which provides clear guidelines on permissible lobbying activities based on their budget. Under this election, charities can allocate a limited percentage of their expenses toward lobbying efforts, as long as these expenditures fall within safe harbor limits. However, activities such as grassroots lobbying, where the public is mobilized to contact legislators about a specific issue, are also subject to these limits.
Political Campaign Intervention
Perhaps the most stringent restriction on 501(c)(3) organizations is the absolute prohibition on political campaign activity. Organizations cannot directly or indirectly support or oppose any candidate running for public office. This ban applies regardless of whether the activity explicitly endorses a candidate or merely provides indirect benefits, such as distributing materials that favor one candidate’s platform over another.
Examples of prohibited political campaign activities include:
- Endorsing a candidate in any organizational communication or public statement.
- Providing financial contributions or other resources to a campaign.
- Organizing events or activities that support or oppose a particular candidate.
- Allowing a candidate to use the organization’s facilities, staff, or resources in a way that demonstrates preferential treatment.
Violations of these rules can result in severe penalties, including the revocation of the organization’s tax-exempt status and the imposition of excise taxes on both the organization and its leaders.
Educational Activities vs. Advocacy
It is important to distinguish permissible educational activities from impermissible political advocacy. Educational activities involve providing factual, unbiased information that helps the public understand social, political, or economic issues. However, if the communication is designed to sway opinion toward or against a legislative or political outcome, it may be viewed as lobbying or political intervention, potentially crossing the boundaries of permissible activities for tax-exempt organizations.
Consequences of Non-Compliance
If a tax-exempt organization is found to have violated these restrictions, the consequences can be severe. The IRS may revoke the organization’s tax-exempt status, subject the organization to excise taxes, and require repayment of improperly received contributions. In some cases, individual officers or directors who knowingly authorize impermissible activities may also be held personally liable for penalties.
For these reasons, it is critical for tax-exempt organizations to carefully evaluate their public communications, advocacy efforts, and relationships with legislative or political entities. By maintaining a clear focus on their charitable purposes and adhering strictly to IRS guidelines, organizations can preserve their tax-exempt status while fulfilling their mission.
Transparency
Public charities are required to operate in a transparent manner that involves the disclosure of their finances, their activities, and the identity of the individuals that govern the organization. Not only is the IRS’s annual informational return for tax-exempt entities, the form 990, publicly available, but tax-exempt organizations are required to make certain documents available for public inspection and copying upon request. The documents that are available to the public include the organization’s application for tax-exemption (IRS form 1023), the governing documents, including the Certificate of Incorporation and bylaws, the exemption ruling letter issued by the IRS, and the annual IRS form 990.
Private Benefit is Prohibited
It is important to understand that once funds are donated to a tax-exempt entity or a tax-exempt entity earns revenue from its services, its assets are ultimately dedicated to the public and do not belong to the company’s founders, employees, or donors. If the company dissolves, all of its remaining assets must be transferred to another public charity. The prohibition on “private inurement,” as the tax code refers to it, includes paying a founder or employee compensation that is considered unreasonably high. If a private benefit is more than incidental, the nonprofit’s tax-exemption could be jeopardized and any company insiders that benefitted (and the board members who approved of the private inurement) could be liable for excise taxes and other penalties.
Excess Benefits Transactions
If a tax-exempt organization provides financial compensation or benefits, such as a salary, to an individual with substantial influence over its affairs—such as an executive, founder, or key decision-maker—the amount must be reasonable and comparable to compensation paid for similar positions within charitable organizations operating in the same industry and region. Compensation that exceeds this standard is classified as an excess benefit transaction, which violates tax regulations governing nonprofit organizations.
An excess benefit transaction occurs when the compensation or benefit provided exceeds what is considered fair and reasonable for the role. If such a transaction is identified, the organization must report it to the IRS, and excise taxes are imposed on the recipient of the excess benefit. Additionally, any board member or officer who knowingly approved the excessive compensation may also face penalties, including personal liability for excise taxes.
To avoid engaging in excess benefit transactions, nonprofits are required to follow strict procedures when determining executive compensation and benefits. The board of directors must evaluate and approve the compensation of key executives, including the chief executive, using a standard of reasonableness. This process typically involves:
- Comparison with Similar Roles:
The board reviews compensation data from at least three comparable positions at similarly-sized organizations in the same geographic region and industry. These comparisons may include both nonprofit and for-profit organizations. - Independent Salary Surveys:
The board may commission an independent salary survey or compensation study to confirm that the proposed salary aligns with industry norms. - Annual Review and Approval:
The board must formally review and approve executive compensation on an annual basis during a board meeting. If the executive in question serves as a board member, they must recuse themselves from participating in the discussion and vote on their own compensation.
By following these steps, the board ensures that the organization maintains compliance with IRS regulations, avoids penalties, and upholds its commitment to using its resources for the public good. These safeguards protect the organization’s tax-exempt status and help maintain public trust in its operations.
Books and Records
The foundation’s officers, directors, trustees, and staff are charged with ensuring that the organization meets its ongoing compliance requirements in order to continue to maintain its tax-exempt status. Public foundations must maintain their books and records to document that they are in compliance with the various applicable tax laws and regulations and to track the sources of their revenue and expenses that are reported on the annual informational return (Form 990 or Form 990-EZ). Retention of a nonprofit’s records varies depending on the types of information and documents that are being held. For example, some records are permanently maintained, while others can be disposed of after three or four years.
Nonprofits should maintain the application for recognition of tax-exempt status, IRS form 1023; the determination letter in which the IRS notifies the company of its approval of tax-exempt status; the Articles of Organization or Certificate of Incorporation; the bylaws; all board and company policies (such as the conflict of interest policies, whistleblower policy, and executive compensation policy); and all board of directors’ and members’ meeting minutes. If an organization has employees, employment tax records must be retained for a minimum period of four years after filing the fourth quarter for a given year.
Aside from tax reasons, there may be other reasons to maintain company records, such as for purposes of insurance, fundraising, or operating the company’s programs, which may require that records be kept longer than required by the IRS and New York State Department of Taxation and Finance.
Conclusion
Founding a public foundation can be a complicated, though worthwhile and fulfilling, endeavor. There is a maze of compliance requirements that must be fulfilled in order to ensure that the foundation operates in accordance with the law. Through careful planning, the organization can successfully navigate applicable laws and regulations to preserve and protect its tax-exempt status.

Claudia Pollak
Claudia Pollak, Esq. is an experienced Westchester and NYC-based employment lawyer representing employees facing discrimination, retaliation or wrongful termination because of their race, disability, pregnancy, sexual orientation, gender, or other protected characteristic. She also advises on executive severance agreements and restrictive covenants. Call her at 914-LAW-9111 (914-529-9111) for a free consultation.
Employment Discrimination
Employment Discrimination
Employees in Westchester County and other parts of New York state are protected from discrimination in employment based on a number of personal characteristics.
Sexual Harassment
Sexual Harassment
Sexual harassment at the workplace has always existed, but the #metoo movement has brought this ugly secret out into the glaring light of day.
Disability Discrimination
Disability Discrimination
Being disabled can impact individuals in several important ways. For a great many Americans, however, it does not prevent them from working.
Breach of Executive Employment Agreement
Breach of Executive Employment Agreement
Despite the existence of an enforceable contract, employers sometimes terminate an executive’s employment before the end of term, and in violation of the employment agreement.
Gender Discrimination
Gender Discrimination
There are many types of gender discrimination occurring in the workplace, including discrimination based on sexual orientation, pregnancy, or transgender or non-binary status.
Hostile Work Environment
Hostile Work Environment
Some of our most vulnerable populations are experiencing increasingly stressful employment situations. In fact, many workers in America (up to 1 in 5) feel they work in a hostile or abusive work environment.
Racial Discrimination
Racial Discrimination
While many businesses have openly acknowledged the problems of discrimination and inequity facing black workers in America as a result of the Black Lives Matter movement, racial discrimination still regularly occurs in the workplace.
Severance Agreements
Severance Agreements
Whether your position is being eliminated in corporate downsizing, or you are getting laid off or fired for another reason, at some point in your life you may find yourself reviewing a severance agreement.
Pregnancy Discrimination
Pregnancy Discrimination
The last thing you need when you’re starting a family – or growing one – is financial uncertainty or the stress and anxiety that comes from becoming the target of discriminatory treatment at work because of your pregnancy.
New York Equal Pay Law
New York Equal Pay Law
New York Labor Law §194, requires that employees of a particular establishment be paid a wage that is equivalent to the wages paid to employees of the opposite sex, or of a different race or sexual orientation, or who are members of any other class of employees.
GLOWING CLIENT REVIEWS

She puts the needs of her clients first.
Amanda Moody

Very knowledgeable lawyer. Very commendable.
Thomas Sauer

I connected with Claudia for assistance negotiating an employment agreement. Claudia was very responsive right from the start. Once we agreed to move forward, she worked over a weekend and we had calls on a Saturday and Sunday to be in a position to respond by Monday. Her detailed and thoughtful review was extremely valuable to me. She explained all of her rationale and provided me with a detailed response which I used. I am so glad I worked with Claudia and would highly recommend her services!
Salvatore Sama

I wish I could give her a million stars.
Lisa Smith

Its hard to find an attorney who cares about their clients. Well I did Her name is Claudia Pollack she was very fair with me. She provided the service I have never have gotten from any attorney. She is knowledgeable about the law and she explained to me every step of the way what she was doing and why. She had patient’s with me, pretty much held my hand and explained all my options.When Claudia says she is going to do something she does. Her communication level was super.Claudia whordked hard and fast and got the job done.Having hired Claudi I was able the have a lot less stress and most of all slept very well at night knowing that she was on my side
Steven Katz
I consider myself fortunate to have been introduced to Claudia, who performed flawlessly on my behalf in extremely difficult and trying conditions. As a senior level executive, my expectations for professionalism and service delivery are high and I can honestly say that Claudia went far above and beyond my expectations to represent my best interests. She is tenacious and fights for her clients rather than pursuing the path of least resistance. Her case preparation was extremely thorough and diligent. When combined with her experience and high level of competence in employment law, she is a formidable adversary to any employer, large or small, who exercises digressions in employment tactics. It is without reservation that I recommend Claudia’s services to handle any employment matter, large or small, that requires legal finesse.
Richard Hayes
TESTIMONIALS
Smart, knowledgeable and accessible. Claudia has expertly represented me since 2014 with several successful contracts negotiations.
Very knowledgable lawyer, very commendable.
She puts the needs of her clients first.
I wish I could give her a million stars.