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2010 Issue 7 | Download as a PDF


Recent Court and Agency Decisions Forge a New Type of Federal Political Committee: The Independent Expenditure-Only PAC
Briefing Sept. 15: Understanding the New Independent Expenditure-Only PAC


Recent Court and Agency Decisions Forge a New Type of Federal Political Committee: The Independent Expenditure-Only PAC

For nearly forty years, the Federal Election Campaign Act has imposed a $5,000 annual limit on the amount an individual may give to a federal political committee. And corporations, including nonprofit corporations, were banned from making contributions to federal PACs altogether. Times have changed, however.

Recent court decisions have prompted the Federal Election Commission (FEC) to approve a new type of federal PAC that may be established by corporations to solicit and receive contributions in unlimited amounts not only from individuals but also from corporations and unions. These independent expenditure (IE)-only PACs may then spend those funds on ads and other communications that expressly advocate the election or defeat of federal candidates as long as there is no coordination with candidates or political parties.

In two advisory opinions issued by the FEC this summer, the agency has laid out a blueprint for constructing an IE-only PAC that will help groups seeking to have a greater influence in federal elections.  In the first opinion (AO 2010-09, issued to Club for Growth), the FEC confirmed that a nonprofit corporation could pay the costs of establishing, administering, and fundraising for an IE-only PAC that raises contributions in unlimited amounts from individuals as long as the PAC reports those costs as in-kind contributions. Additionally, the corporation is not required to limit its solicitations to a restricted class consisting of executive and managerial personnel, members, and their families because an IE-only PAC that is described in the advisory opinion is different from a typical corporate PAC.

In the second opinion (AO 2010-11, issued to Commonsense Ten) the FEC concluded that, in addition to individuals, corporations and unions could make unlimited contributions to an IE-only PAC. Rules prohibiting foreign nationals, government contractors, national banks, and corporations created by act of Congress from giving to IE-only PACs are still in place, however. Organizations that create IE-only PACs should screen for such contributions to be sure they are in compliance with the law.

In both opinions, the FEC advises an organization that wishes to create an IE-only PAC to attach a letter to the PAC’s Statement of Organization (FEC Form 1) noting the PAC intends to raise funds in unlimited amounts in order to distinguish itself from the typical corporate PAC. The letter should also be clear that the PAC will not use those funds to make contributions, whether they are direct or in-kind (including coordinated communications), to federal candidates or political committees.  A sample of such a letter is included as an attachment to both advisory opinions. See the links above.

The two advisory opinions follow recent court decisions striking down historic limitations on independent speech. Earlier this year, the US Supreme Court ruled in Citizens United v. FEC that corporations have a constitutional right to make independent expenditures in federal elections because speech that is not coordinated with candidates or political parties does not pose the same risk of corruption (or the appearance of corruption) that coordinated communications do. According to the Court, this anti-corruption rationale is the only legitimate governmental interest that allows restrictions on political speech in spite of the First Amendment. (For more information on the Citizens United decision, see
eUpdate, 2010 Issue 2.) Two months after Citizens United was handed down, the DC Circuit Court of Appeals followed the Supreme Court’s reasoning when it ruled in SpeechNow.org v. FEC that contribution limits imposed on individuals who wish to give to a federal PAC that does nothing but make independent expenditures violate the individuals’ First Amendment rights. The FEC opinions are the logical result of these decisions.

Why a 501(c) Organization May Find an IE-Only PAC Useful

Because the Supreme Court has already ruled that corporations can make independent expenditures directly, it’s reasonable to ask why an existing tax-exempt corporation would want or need to create an IE-only PAC in the first place. For many organizations, the answer lies in the tax code.

Take the case of an organization exempt from tax under section 501(c)(4) of the Internal Revenue; although, this example could apply to organizations exempt under other 501(c) subsections as well, like unions exempt under 501(c)(5) and trade associations exempt under 501(c)(6). For a 501(c)(4) organization, there are several potential advantages to establishing an IE-only PAC.

First, a 501(c)(4) organization must be primarily operated to promote social welfare, such as advocating for stronger environmental controls on corporate pollution. Activities intended to influence elections, including advocating for the election or defeat of particular candidates, don’t qualify. If a 501(c)(4) engages in too much electoral activity, it risks losing its tax exemption. By establishing a separate IE-only PAC out of which to make independent expenditures, the 501(c)(4)’s tax status would remain unaffected no matter how much the PAC spends.

Second, a 501(c)(4) is generally required to pay a tax on the lesser of its net investment income or the amount it spends to influence elections. The tax rate is equal to the highest corporate income tax rate, which is currently 35%. If a 501(c)(4) organization that has spent years building up its investments decides to make sizeable independent expenditures, it could end up with a very large tax bill. In contrast, an IE-only PAC pays the tax only on its net investment income, which would presumably be small if anything for a PAC that quickly spends whatever it can raise.

Finally, large contributions to 501(c)(4) organizations may subject a donor to the federal gift tax. Contributions to IE-only PACs, which are likely to be exempt from tax under section 527 of the tax code, are not subject to the gift tax. A wealthy donor who is concerned about the gift tax and wishes to give to an organization to support independent expenditures may be much more likely to give to an IE-only PAC. There is one potential drawback to making such a contribution, however. An IE-only PAC is required itemize any contribution it receives in excess of $200 in a year, regardless of whether the contribution is earmarked for an independent expenditure.  This means the donor’s name, address, occupation, employer, and the amount contributed will become publicly available information. If a donor prefers to remain anonymous, making an unrestricted gift to a politically active 501(c)(4) may be the preferred approach.

The advisory opinions apply only to federal election activities, but a number of states have adopted a similar approach in light of the Citizens United decision. In some cases, state legislatures have amended their election laws. In others, state regulators have revised their regulations or issued opinions providing for IE-only PACs. Nonprofit corporations that would like to make independent expenditures at the state and local level are encouraged to consult with the appropriate agencies and the organizations’ legal counsel to determine whether an IE-only PAC is required or would at least be advantageous.

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Briefing Sept. 15: Understanding the New Independent Expenditure-Only PAC

Harmon, Curran, Spielberg + Eisenberg, LLP invites you to a briefing on recent developments in federal election law:  Understanding the New Independent Expenditure-Only PAC
Recent rulings have paved the way for a new form of federal political committee—the IE-only PAC—that enables organizations to raise unlimited amounts from individuals, corporations, and unions to spend on ads and other communications urging the election or defeat of federal candidates.  At the same time, new rules will soon be in place defining when such communications will be considered to have been made independently of candidates and political parties.  Please join us for a briefing explaining how an organization may be able to use an IE-only PAC to accomplish its electoral goals.
Topics to be discussed include:
  • An overview of the types of communications organizations can make in federal elections. 
  • Understanding the steps involved in establishing an IE-only PAC.
  • The tax advantages to influencing federal elections through an IE-only PAC.
  • How to avoid making coordinated communications, including an explanation of recent amendments to the FEC’s coordination rules.
  • How the states are responding
                        Date:               Wednesday, September 15, 2010
                        Time:                8:30am – 9:30am
                        Location:          1726 M Street, NW
                                                Suite 402
                                                Washington, DC
Coffee and continental breakfast will be provided.
Space is limited. RSVP required.  Please RSVP to jsiegel@harmoncurran.com.  You will receive an e-mail confirming your reservation. 

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This publication is designed to provide accurate and authoritative information about the subject matter covered. It is not distributed with the intent to render legal, accounting, or other professional advice. The services of a competent professional should be sought if legal advice or other expert assistance is required.


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