7 June 2021 update
Q1. When we talk about ALA’s legal framework, what do we mean?
ALA is a non-profit association, incorporated under the laws of the Commonwealth of Massachusetts. ALA is tax-exempt under section 501(c)(3 ) of the U.S. Internal Revenue Code. A broad range of federal, state and local laws affect ALA – as a non-profit corporation, as a tax-exempt organization, as an association, as an employer, as a publisher and conference sponsor.
Q2. Why is ALA incorporated – and what difference does that make to ALA members?
While it is possible to be an association without incorporating, most associations elect to become incorporated. By incorporating, an association becomes a legal entity composed of individual members but with a legal existence apart from its members. This has significant advantages for the members of an association. Most importantly, members are not held personally liable for obligations incurred by their association and are not personally liable if the officers, directors or staff of the association violate the law in the course of their work for the association.
Q3. What does “non-profit” mean in a legal context?
It does not mean that ALA is prohibited from having revenues greater than its expenses. There are many specific differences in law and regulation between non-profit and for-profit entities. The overriding difference is that while a forprofit corporation has equity shareholders – the legal “owners” of the corporation, a non-profit corporation does not have shareholders. Its profits are not distributed to owners, but remain in the corporation to be used to further its mission.
Q4: ALA is incorporated under the laws of the commonwealth of Massachusetts and ALA-APA under the laws of the state of Illinois? Does the state of incorporation make a difference?
Yes. Many aspects of association operation – such as laws governing Board meetings and voting – are governed by state laws.
Q5. What does it mean that an association is “tax-exempt”?
The determination that an organization may be “tax-exempt” primarily relates to the purpose for which it is organized and operated. A determination by the U.S. Internal Revenue Service that an association is tax-exempt generally permits that association to earn specific types of income without paying federal income tax. [see Q6] Most importantly for ALA, this means that ALA does not pay federal income tax on dues received from its members, on subscriptions to its journals, on registration for its conferences and institutes, and on other mission-related income.
Q6. Does that mean that ALA pays no taxes at all?
No. First, ALA does pay some federal income tax. The Internal Revenue Code states that income which is not directly related to an association’s tax-exempt purpose is subject to tax – called Unrelated Business Income Tax (UBIT). For instance, ALA pays federal income tax on revenue derived from advertising in its journals. The distinction between taxable and non-taxable revenue is the subject of voluminous IRS rulings and court decisions.
Q7. Is the particular type of tax-exemption – 501(c)(3) – significant?
The U.S. Internal Revenue Code grants tax-exempt status to non-profit organizations in more than 20 categories under Section 501(c). Depending on its category of tax-exemption, a non-profit organization may be permitted to, or prohibited from, engaging in various activities.
Section 501(c)(3) is reserved for organizations organized for public benefit. Permitted tax-exempt purposes include charitable, educational and literary. As a 501(c)(3) organization, ALA may use its funds for charity, education, the promotion of literature, and related administrative costs. Charitable activities include promoting literacy, giving scholarships, and improving libraries. Educational activities include publications, seminars, institutes and conferences. Literacy activities include promoting books and authors, and providing forums for discussion of literary topics.
There are limitations on 501(c)(3) organizations. Any activities which are not charitable, educational or literary must be “insubstantial” – i.e. short-term, limited in nature. There are limitations on the amount of lobbying done by 501(c)(3) organizations [see Q8-9]. All political activity is prohibited [see Q12]. Transfer of funds to organizations in different tax-exemption categories is prohibited, unless the transfer furthers a charitable, educational, or literary purpose – or unless it is a loan at market rates of interest, as is the ALA loan of funds to ALAAPA. Other 501(c)(3) organizations include the American College of Surgeons, American Psychological Association, the National PTA, the United Way, and the Arthritis Foundation.
Many association which might appear to be “like ALA,” are, in fact, exempt under section 501(c)(6), the section which deals with business leagues, chambers of commerce, real estate boards, and boards of trade. The IRS defines a “business league” as an association of persons having some common business interest, the purpose of which is to promote such common interests. ALA-APA is tax-exempt under section 501(c)(6). Associations in this category include the American Bar Association, and the American Medical Association. State library associations – ALA chapters – include both 501(c)(3) and 501(c)(6) organizations.
Q8. What limits does the U.S. Internal Revenue Code place on ALA’s lobbying activity?
No “substantial” percentage of activities of a 501(c)(3) organization may be focused on “propaganda, or otherwise attempting to influence legislation…” – in other words, on lobbying. While the IRS initially provided only the vague standard of “no substantial lobbying…,” one federal case (Seasongood v. Commissioner) determined that spending up to 5% of the budget for lobbying might be within the “insubstantial” range.
In 1976, an elective alternative provision [501(h)] was added to the law to permit 501(c)(3) organizations to be guided by an absolute numerical percentage test; final rules were issued in 1990. This elective rule provides an alternative guide to the vague “insubstantiality” test. The provision provides a mathematical formula – a sliding scale – for determining permissible lobbying expenditures as compared to (most) other association expenditures (excluding fund-raising expenditures). There is an absolute limit – regardless of the size of the budget – of $1,000,000/year on lobbying expenditures. An exempt organization is responsible for maintaining careful records of resources used for lobbying and must identify both direct and grassroots lobbying on its IRS information forms. Penalties apply for going over the limit. ALA is well below its allowable limit.
Q9. What is lobbying?
Lobbying includes oral or written communication with members of a legislature, their staff, political appointees, senior executive office personnel for the purpose of influencing legislation or regulation. Preparation for lobbying, including research intended to be used for lobbying, is included in the definition of lobbying. Any communication which urges ALA members – explicitly or implicitly – to contact legislators regarding a specific piece of legislation is considered direct lobbying. Meetings may constitute a “lobbying communication” if the meeting is used to prepare for and urge members to act for/against specific legislation. Grassroots lobbying is an attempt to influence legislation through a communication with the general public. Grassroots lobbying may not constitute more than 25% of the permitted expenditure for direct lobbying.
Q10. What limits does the U.S. Internal Revenue Code place on ALA’s political activity?
501(c)(3) organizations are completely prohibited from engaging, directly or indirectly, in any political campaign for or against a candidate for local, state or federal office. The penalty for violation of these prohibitions is revocation of taxexempt status. A “candidate for public office” is defined as “an individual who offers himself, or is proposed by others, as a contestant for public office.”
- The name of a 501(c)(3) organization may not be used to support or oppose a candidate for public office.
- Stationery of a (c)(3) organization or its organizational components – divisions, round tables, offices, committees – may not be used to make comments favorable – or in opposition to – a candidate for office.
- Staff or leadership titles in a 501(c)(3) organization may not be used by individuals in discussing their individual support or opposition for candidates, whether in writing or orally, in a public forum.
- Both campaign contributions and statements of support or opposition are prohibited.
- Providing a forum for a candidate to speak is viewed as supporting the candidate. Providing a forum for opposing candidates to speak will be viewed as supporting one candidate if the organization publicly supports that candidate’s policies.
- The prohibition on organizational support or opposition for candidates does not in any way prohibit staff, officers or directors, or members from expressing their personal views, as long as organizational titles, stationary, publications, websites, forums (including discussion lists, blogs, wikis), staff time and other resources (including headquarters and conference meeting rooms) of the 501(c)(3) organization are not used.
- A 501(c)(3) organization may not participate in or sponsor a political action committee (PAC).