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eUpdate: Archives

2001 January Issue | Download as a PDF


FEC Adopts Post-Christian Coalition Coordination Regs
Spam, Spam, Spam, Spam: How to Win Friends and Avoid Blacklisting
IRS Victory for "Exempt But Non-Recognized" Nonprofits
No Profit, No UBIT
When All Else Fails, Read the Hatch Act


FEC Adopts Post-Christian Coalition Coordination Regs

After the 2000 election, the FEC adopted new regulations describing when general public political communications are coordinated with candidates, their campaigns, and political parties. The new coordination standards help to define when such communications will be considered prohibited corporate expenditures or political contributions subject to stringent limits. But the FEC has by and large failed to adequately define what will qualify as "general public political communications."

Until now, the Federal Election regulations did not clearly define "coordination." Therefore, the FEC could and did allege coordination between organizations and candidates, campaigns, and party committees even in cases where their contacts were relatively attenuated. Organizations had no basis to know whether their independent activities might be considered coordinated, and thus in-kind contributions. The new regulations are designed to apply the narrower standards set for coordination in the landmark 1999 FEC v. Christian Coalition case. (See NN 9/99, p. 1 for Christian Coalition decision; see NN 10/00, p. 2 for recent AFL-CIO coordination case applying Christian Coalition standard.)

The regulations establish three alternative standards for determining when expenditures for communications that include a reference to a clearly identified candidate are transformed into in-kind contributions. A communication need only meet one of these tests in order to be considered coordinated for the purpose of FEC enforcement.

First, a communication to the public will be considered coordinated if it is made at the "request or suggestion" of a candidate, her authorized committee, party committee, or affiliated agents. This regulation derives from the Christian Coalition court's analysis that "the fact that the candidate has requested or suggested that a spender engage in certain speech indicates that the speech is valuable to the candidate, giving such expenditures sufficient contribution-like qualities." The FEC further explained that it would consider both the specificity of such a request or suggestion and whether the requested action is for the purpose of influencing a Federal election.

Candidate "control or decision-making" also indicates coordination. Thus if the candidate or party committee exercises control or decision-making authority over a communication's content, timing, location, mode, intended audience, volume of distribution, or frequency of placement, the communication will be considered coordinated.

"Substantial discussion or negotiation" between the person responsible for creating or paying for the communication and a candidate or his committees also makes a communication coordinated. Topics of substantial discussion would again include a communication's content, timing, location, and so forth. The FEC clarified the ambiguous term "substantial" to mean the substance of negotiations, not their frequency. The FEC explained that "when the topic of discussion turns from the candidates' views on a political issue to the candidates' views on how to communicate that issue, there is far greater likelihood of collaboration." Discussions on a communication's timing, location, audience, frequency, etc. will be considered "substantial" only if they convey specific information.

Under any of these standards, determination of coordinated communications will be fact-specific. Any activity that meets one of the new coordination standards will be treated both as an expenditure by the organization and as an in-kind contribution to the recipient candidate or campaign. In addition, the new regulations rewrite the definition of "independent expenditures" to bring it in line with the new coordination standards (by definition, independent expenditures should not meet any of these standards).

The Commission advises that the new regulations supercede a number of past Advisory Opinions that employed a broader understanding of the meaning of coordination. The FEC noted, for example, that many such Advisory Opinions found evidence of coordination in cases in which a former campaign employee joined an organization that wished to make independent expenditures. Under the new regulations, this would not by itself be enough to indicate coordination. In addition, the new regulations contain an exception: a candidate's response to written or oral requests for information on his stance on legislative or public policy issues would not alone cause the communication to be considered coordinated.

Although the FEC set these three standards for coordination, it did not define "general public political communications" beyond the requirement that they contain a reference to a clearly identified candidate (the candidate's name or picture constitutes such a reference). Thus nonprofits cannot know if the regulations are limited to express advocacy communications, or if there are geographical (e.g., district or state in which the candidate is running) or temporal (e.g., 60 days before an election) criteria to limit what communications are covered. No guidance has been provided to differentiate election year grassroots lobbying from "coordinated general public political communications." The FEC's failure to provide a content standard means that many political communications, including issue advocacy and other communications that do not involve express advocacy, could be treated as prohibited in-kinds.

The regulations will not go into effect until thirty legislative days into the 107th Congress. They are available in pdf format on the FEC's website at

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Spam, Spam, Spam, Spam: How to Win Friends and Avoid Blacklisting

Nonprofits with extensive and successful direct mail experience may be surprised at the vitriol that can be directed at their e-mail campaigns. A single unsolicited mass mailing or listserv subscription can generate hundreds of complaints to the organization and its Internet Service Provider (ISP), and even nominations for blacklisting to anti-spam watchdogs. This reality of the Internet can come as quite a shock to many organizations, which presume that a solicitation for a good cause is nothing to get excited about. Unfortunately for the uninitiated, experience in traditional direct marketing isn't worth much in the on-line world.

You may be wondering why there is so much backlash against spammers. Deleting spam in the inbox doesn't take much effort, but spam is not cost-free to the recipient like regular direct mail solicitations (indeed, pre-sorted bulk direct mail subsidizes first class mail). Unsolicited commercial e-mail accounts for some 30 percent of all e-mail traffic. It contributes to delays and breakdowns of the Internet by using up server space and processing time at every node it passes through. These effects have costs which can be measured in dollars, and are ultimately passed through to the user in the form of higher Internet access charges. Furthermore, due to the Internet's non-commercial beginnings, the on-line community frowns on unsolicited solicitations, no matter what their source. This effectively lumps a charitable appeal in with make- money-fast-scams, offers for pornography, and the rest of the advertisements that flood your inbox every day.

Unsurprisingly, several groups have formed to combat spam. The Coalition Against Unsolicited Commercial E-mail (CAUCE at
www.cauce.org) is pushing Congress to pass legislation prohibiting spam, while Mail Abuse Prevention System, LLP (MAPS at www.mail-abuse.com) is working on more direct preventative measures such as listing the sender in a blacklist system that subscribers (typically ISPs) use to block any mail sent from the offending sender.

Keep in mind that if an organization like MAPS blacklists your e-mail, it is not censoring you. ISPs, like MSN and Earthlink, subscribe to the MAPS blacklist (technically the "Realtime Blackhole List") on a voluntary basis. While some people listed on the MAPS blacklist have sued for a variety of ills, none have been successful. Attempts to sue the ISPs using the blacklist have also failed because ISPs are not common carriers, like the U.S. Postal Service, and are under no obligation to transmit any message to their users, nor are intermediary routers under an obligation to pass messages on to the next router.

Charities and nonprofits can still use the Internet and e-mail to reach their supporters, but in the interest of being good Internet citizens, they should follow MAPS' two principles governing e-mailing lists and listserv use: all communications must be mutually consensual, and no one should have to unsubscribe to a list to which they did not intentionally subscribe. MAPS has come up with a set of five guidelines that will help nonprofits uphold these principles.

First, MAPS recommends that permission to send e-mail to new subscribers or list members be fully verified before regular mailings commence. This is sometimes known as "double opt-in." In other words, after a visitor to your website enters her e-mail address to join your list (or, you have bought a list from a vendor who represents that the list members have indicated a willingness to receive mail-see below), you should send an e-mail to that address to verify that you have the recipient's permission to send her e-mail. Verification should require an affirmative response, in the form of a reply or another visit to the website. While this may be a tedious procedure, it will help your organization avoid spam backlash.

The Direct Marketers Association has proposed an opt-out standard: unsolicited e-mail announcing your intent to begin sending e-mail to an address unless the recipient replies to the message. Anti-spam organizations hate this practice. The problem is that unscrupulous mailers do not honor such requests, but use them to verify that the address is live (a tremendous amount of spam is sent to non-existent e-mail addresses). This makes the address vulnerable to additional spam and also enables spammers to exchange or resell live addresses. Internet users quickly learn that not replying to unsolicited e-mail helps prevent the arrival of additional spam.

If you buy a list from a vendor, as mentioned above, it is important to verify the willingness of the list members to receive your e-mail through an opt-in procedure. In all cases, a nonprofit should protect itself with a written contract with representations that the addressees have consented to the e-mail, and appropriate warranties and indemnification to that effect.

Second, in every communication, it is important to include simple and multiple means of unsubscribing from the list. While an automated system, such as the "unsubscribe [list]" command in listserv, is reasonably reliable, list managers should provide alternate means of unsubscribing, such as direct e-mail to the list administrator or a telephone number.

Third, do not sell, lend or rent your list of addresses to another organization unless you have affirmative permission from the people on the list to do so.

Fourth, prominently disclose the terms and conditions of subscriber address use, making note of the likely frequency of messages, their subject matter, the conditions on sale, loan or rental of addresses, and your address and personal information privacy policy. If any of these are changed, it is incumbent on list administrators to notify subscribers.

Fifth, in the interest of helping to keep the Internet free of messages to invalid e-mail addresses, periodically check the list for accuracy.

While these procedures can be burdensome, and will result in fewer messages going out to people your organization thinks would be interested in your message or supportive of your goals, it is important to take note of the consequences of even inadvertently attracting the wrath of the anti-spam community. If you send out your own e-mails, they may be blocked, whether they are missives to your supporters or the personal e-mail of your staff. If you outsource your list management and e-mailing, the vendor may find itself subject to the same sanctions, and will be unhappy with you. In extreme cases, some ISPs may even block their users' access to your website if they find no other reliable way from discouraging your abuse of the e-mail protocols.

Several large nonprofits and corporations, whose intentions were surely good, have found themselves subject to these anti-spam measures. Keeping in mind the mores of the Internet, your organization will not have to suffer the same fate.

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IRS Victory for "Exempt But Non-Recognized" Nonprofits

Recent IRS Service Center Advice spells good news for 501(c)(4)s and other 501(c) organizations that have not filed Form 1024, the Application for Recognition of Exemption Under Section 501(a). The issue revolves around whether or not the IRS Service Center in Ogden, Utah may send "deficiency" notices to these "exempt-but-non-recognized" organizations who refuse to sign IRS-issued for-profit corporate tax returns and pay the assessed taxes.

The Internal Revenue Code clearly provides that most 501(c)(3)s, as well as nonprofits exempt under Sections 501(c)(9) and 501(c)(17), are required to file an Application for Recognition of Exemption. The statute's silence regarding other 501(c) organizations implies that they are not required to obtain recognition from the Service of their tax-exempt status as long as they meet the requirements of the Code.

501(c)(4)s and other organizations that elect not to file an exemption application are still subject to filing requirements regarding Form 990. When some mailed in their 990s, the Ogden Service Center could not locate them on its master directory of recognized tax-exempt organizations and automatically converted their 990s to Forms 1120, the for-profit Corporation Income Tax Return. It then mailed statutory "deficiency notices" to those that refused to sign the corporate tax return.

The IRS' National Office disagreed with the Ogden Service Center's approach to organizations that are not statutorily required to file an exemption application recognition. In its Service Center Advice, the National Office drew a distinction between IRS recognition of tax-exempt status and the status itself conferred automatically by the Code, noting that "requiring the [tax-exemption] application to 'establish' or 'seek recognition' of an organization's exempt status is different from saying an organization is not exempt without the approval of an application." While the National Office suggested that the Ogden Service Center is perfectly within its limits to encourage (c)(4)s and others to file Form 1024 to clarify their tax status, it recognized that the IRS cannot compel non-filing nonprofits to pay the same taxes as for-profit corporations. Nor can it automatically issue deficiency notices if an organization refuses to sign an automatically issued corporate tax return.

The Service Center Advice is a victory for smaller, often overlooked nonprofits, signaling that the IRS is finally recognizing their right to avoid the cost and burden of filing an Application for Recognition of Exemption. The National Office even suggested that the IRS establish a separate system or classification for Form 990s filed by organizations that have not applied for recognition of their tax-exempt status to avoid their 990s being treated as "unpostable."

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No Profit, No UBIT

An interesting IRS Technical Advice Memorandum has affirmed that the presence of a profit motive is essential to finding that income from an activity unrelated to an organization's exempt purpose is subject to Unrelated Business Income Tax (UBIT).

The Chautauqua Institution, a New York 501(c)(3), is located on hundreds of acres of land and manages a large number of buildings, including private houses, condominiums, and small hotels, many of which are recognized as buildings of national historic significance. Founded by Methodists in 1874, the Institution carries out its main activities during the summer, when it provides courses in various fields such as music, art, dance, literature, and especially religion, to paying residents and visitors. The Institution recently acquired additional acreage, which it subdivided into lots. The lots were improved to permit the construction of private homes and were subsequently put up for sale.

In its Technical Advice Memorandum, the IRS considered whether income generated by the Institution from providing services to the private buildings and homes on its grounds, including the provision of water, sewer, garbage, and solid waste collection services, should be considered unrelated business taxable income (UBTI). The Tax Code and the Income Tax Regulations define UBTI as income derived from any trade or business regularly carried on by an organization which is not substantially related to the organization's exempt purpose. The Regulations further define "trade or business" as any activity carried on for the production of income from the sale of goods or the performance of services.

In examining the Chautauqua Institution case, the IRS noted that the provision of municipal services was not related to the Institution's exempt activities, and suggested that the activity served private interests-those of the homeowners-rather than a public, exempt-purpose interest. Despite this evidence, the IRS ruled that income from the municipal services was not subject to UBIT because the record did not show "that [the Institution] entered into this activity with the dominant hope and intent of earning a profit."

While the "profit-motive" standard is not explicitly spelled out in either the statute or the regulations, the IRS and courts have frequently used it to show evidence of trade or business activities. Interestingly, the IRS did not impute a profit motive to the Chautauqua Institution, even though the organization did not try to argue that the municipal services were related to its tax-exempt activities.

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When All Else Fails, Read the Hatch Act

The Hatch Act prohibits employees of the executive branch of the Federal government, the District of Columbia government, and certain state and local agencies from engaging in many types of political activity, including soliciting or fundraising on behalf of a candidate and accepting or receiving political contributions. In recent months, two high profile government employees have felt its bite. Though federal employees can and do work with nonprofits, exempt organizations should be careful that their work is not in violation of the Act.

In August a regional administrator of the Environmental Protection Agency, William Yellowtail, agreed to a 100-day suspension without pay to settle alleged Hatch Act violations. The U.S. Office of Special Counsel charged that Yellowtail had violated the Hatch Act when he authorized the use of his signature on campaign solicitation letters sent on behalf of a Montana congressional candidate. Yellowtail denied knowingly violating the Act but nonetheless agreed to the suspension to avoid further investigation and possible litigation.

In December, Michael Hash-the acting administrator of the Health Care Financing Administration-resigned because he improperly co-hosted a fund raiser last May for a Pennsylvania Democratic candidate for the House of Representatives. He also invited two subordinate colleagues to the fund-raiser, an additional violation of the Act. Mr. Hash admitted that he had received an outline of the Hatch Act's restrictions on political activity as part of his orientation materials when he assumed his position in 1998 but had never read them.

These Hatch Act violations recall the fact pattern of Presidential candidate and then-Senator Bob Dole's signature on a nonprofit's fundraising letters in 1995. Although the IRS found that the letters constituted prohibited electoral activity by the nonprofit (see NN 12/00, p. 6), no Hatch Act violation occurred. The Hatch Act does not apply to members or employees of Congress. Nevertheless, these recent incidents provide a useful reminder that nonprofit organizations with PACs must exercise caution. While it is perfectly fine for most government employees to serve as officers and/or board members of a 501(c)(4) or a PAC, they cannot solicit, accept, or receive political contributions in association with these organizations, nor can they be involved in any way with related fundraising activities.

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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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