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Archives
April 2001
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| Cover Story |
McCain-Feingold Passes the Senate |
| Fundraising Focus |
The Ups and Downs of Being Public, Part I: An Overview of the Public Support Test |
| Election Collection |
FEC Considers New Definition of Political Committee |
| Employment Matters |
Arbitration versus Litigation |
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McCain-Feingold Passes the Senate
On April 2, the Senate passed the Bipartisan Campaign Reform Act of 2001 (S.27), more commonly known as the McCain-Feingold Bill, by a vote of 59 to 41. For those who have not been following the battle over McCain-Feingold closely, we offer a summary of some of the bill's more significant provisions. Ban on Soft Money The centerpiece of McCain-Feingold is a ban on "soft money" contributions by corporations, labor unions, and wealthy individuals to the national political parties, their congressional campaign committees and groups they control. The bill also amends the Federal Election Campaign Act (FECA) by setting a $10,000 limit on soft-money contributions to state, district and local committees if those funds are used for activities such as voter registration within three months of a federal election. "Soft money" refers to funds that are not currently subject to regulation by the FECA. In addition to the soft money ban, McCain-Feingold prohibits national, state, district and local committees of the political parties from donating funds to any organization described in sections 501(c) and 527 of the Internal Revenue Code. Increased Contribution Limits McCain-Feingold increases the maximum amount an individual may contribute in any given year for the purpose of influencing federal elections from $25,000 to $37,500, and raises the annual hard-dollar contribution limit to state parties from $5,000 to $10,000. More significantly, the bill increases the amount an individual may contribute to a federal candidate from $1,000 to $2,000 per election, and the amount that may be contributed to a national party committee from $20,000 to $25,000 per calendar year. Another striking change the bill makes to the FECA is that the new contribution limits will be indexed for inflation. Restrictions on Issue Advocacy For advocacy organizations, one of the most significant and possibly troubling features of McCain-Feingold is the restrictions it places on what the bill terms "electioneering communications." An electioneering communication is defined as any broadcast, cable or satellite communication that refers to a clearly identified federal candidate and is made sixty days prior to that candidate's general election or thirty days prior to his or her primary election. In addition, the communication must be made to an audience that includes members of the candidate's electorate. Communications that expressly advocate the election or defeat of a federal candidate are specifically excluded from the definition. Under the bill, labor unions and corporations, including those exempt from taxation under section 501(c)(3) of the Internal Revenue Code, are prohibited from making electioneering communications. Social welfare and political organizations, described respectively in sections 501(c)(4) and 527 of the Internal Revenue Code enjoy a special exemption. They may make electioneering communications if such communications are paid for from funds that come from individual donations (as opposed to donations from corporations or labor organizations) so long as they are not made to an "audience consist[ing] primarily of residents of the state for which the clearly identified candidate is seeking office." Individuals may continue to make unlimited expenditures for electioneering communications subject to new reporting and disclosure requirements. Because of the constitutional uncertainty surrounding the regulation of electioneering communications, the bill includes an alternate definition to be used if the courts strike down the one described above. The alternative, which codifies a provision of current FEC regulations, describes an electioneering communication as one that "is suggestive of no plausible meaning other than an exhortation to vote for or against a specific candidate." Coordination Defined One aspect of federal election law that has proved particularly vexing for advocacy organizations is the lack of clarity surrounding when contact with a federal candidate becomes sufficient to render subsequent public communications by an organization or its PAC a contribution to that candidate. Recent FEC regulations provide a useful and narrow definition. (See NN 1/01, p. 1.) The bill, however, invalidates these regulations in favor of a more expansive definition and requires the FEC to immediately undertake a rulemaking to refine the new definition. In so doing, the FEC is prohibited from requiring that collaboration or agreement with a candidate is necessary to establish coordination. What's Next Now that McCain-Feingold has passed the Senate, its next stop is the House of Representatives. It is widely reported that the House expects to deal with the legislation by the end of spring. Whatever the outcome, the possibility is real that some form of campaign finance reform legislation will become law this year. Stay tuned for future developments. By Paul J. Murphy  The Ups and Downs of Being Public, Part I: An Overview of the Public Support Test Last month's Navigator discussed some of the reporting requirements an exempt organization must comply with when it submits its annual information return, Form 990 [see NN 3/01, p. 3]. This month, we turn our attention to a related issue that is often a source of major headaches to public charities: the public support test from Form 990-Schedule A. When a 501(c)(3) organization is recognized by the IRS as a public charity rather than a private foundation, this is not a permanent classification. Public charities must continue to demonstrate that they meet the IRS' definition of "public" by meeting the standards of the public support test, a mathematical calculation which uses financial information presented on Form 990-Schedule A. The idea behind the detailed calculations is that a public charity should show broad support from numerous sources, rather than relying on large amounts of funding from one or very few sources. The public support test is inherently complex, and is made more confusing by the fact that the instructions for Schedule A are not as detailed as those for Form 990. This article reviews the information needed to complete the test and the procedures involved in calculating public support. In next month's issue, we will highlight some of the difficulties that trip up (c)(3)s when they prepare this portion of Schedule A. This information applies only to (c)(3)s which receive most of their support from gifts and contributions; the rarer (c)(3)s which receive most of their support from service fees related to their exempt activities calculate their support differently. Why Be Public? Public charities should keep in mind that there are numerous reasons why it is to their advantage to demonstrate their public charity status and avoid classification as a private foundation. Private foundations are subject to much more restrictive, onerous, and extensive rules regarding their programs, investment policy, record-keeping, and annual reporting requirements. Among the most important are an absolute prohibition on lobbying activities and restrictions on grants to non-charities and to individuals. In addition, private foundations must pay taxes on their net investment income, and gifts to them are deductible only up to a smaller percentage of the donor's adjusted gross income. It is also difficult for a private foundation to receive grants from another private foundation, since such grants must be subject to expenditure responsibility controls. When to Calculate Public Support A 501(c)(3) public charity must annually calculate its public support for the previous four years by filling out the grid in Part IV, Section A of Form 990-Schedule A. The IRS also requires new organizations to complete a similar public support grid, Form 8734, to demonstrate their public charity status at the end of their advance ruling period, typically the first five years of a (c)(3)'s existence. Organizations that receive an unusually large amount of money from one or more private foundations often perform the test voluntarily to assess the impact of this grant money on their level of public support (see next month's issue for more information on unusual grants). In general, it may be wise for an organization to calculate its public support from time to time in order to plan a fundraising strategy ensuring a sufficiently diverse support base. Performing the Test The public support test is generally calculated over a four year period of time; on Form 8734, it is calculated over the organization's entire advance ruling period. It includes a charity's total income during this period, with some minor adjustments. The test is a fraction (public support over calculation period / total support over calculation period) that results in a percentage. If _ or more of the organization's income comes from public sources, the organization qualifies as a public charity. If the percentage is 10% to 33_%, then the organization has to prove that it qualifies as a public charity based on relevant facts and circumstances. If less than 10% of the organization's income is from public sources, the organization is automatically considered a private foundation. What does the IRS Mean By "Public?" Only certain kinds of income count as public. While grants and gifts from other publicly-supported (c)(3)s and government agencies are automatically considered public in their entirety, most other contributions-including those from foundations, individual donors, and organizations which are themselves not publicly supported charities-are public only up to a ceiling amount. Contributions from these sources made over the calculation period that are less than or equal to 2% of the organization's total support over that period may be counted as public. If a donor gave an amount over that limit, the excess is excluded from public support, though it will be included in the denominator of the fraction as part of the organization's total support. The charity is also required to submit a list of these "excess contributors" to the IRS, with an itemization of the excess, excluded amounts. If a charity is unsure whether an grantor organization is a public charity or a private foundation subject to the 2% threshold, it can look up the organization in IRS Publication 78, which lists all organizations recognized under Section 501(c)(3). This telephone-book sized publication is available for download in zip format on the IRS' web site at www.irs.gov/bus_info/eo/eosearch.html; alternatively, you can perform a search of the Publication 78 database on the same page. When a charity calculates how much a donor gave in order to apply the 2% limitation, it should keep in mind that contributions made by the donor, certain other family members and some organizations in which the donor has an interest must all be aggregated. For example, gifts by Mary Doe, her husband and daughter would all be added together before calculating the list of excess contributors. Gross income from interest, dividends, amounts received from payments on securities, rents, royalties, as well as net income from unrelated business activities, do not count as public support, though they are included in the denominator of the calculation as a component of total support. Gross receipts from admissions, merchandise sold, and fees for services performed in relation to the organization's exempt purpose are totally excluded from the support fraction, as is capital gain income. These latter types of income should be left out of both the numerator and denominator of the fraction. Government payments are particularly hard to characterize for purposes of the public support test. Although government payments are frequently called contracts, many are actually grants. Whether a particular government payment represents a grant (which should be reported in the "contributions, gifts, and grants" line) or contract income (which must be reported as fees for services in the "gross receipts" line) depends on the specific nature of the payment. If the payment enables the charity to provide services benefitting the public or helping the government to fulfill its mission, the payment is a grant. If the payment primarily serves the direct, immediate, and internal needs of the government, the payment is a contract payment. For example, a charity that receives money from the government to perform research that could potentially benefit all U.S. citizens should categorize that income as a government grant. If the charity were performing a laboratory test solely to help support a government scientist's research, then the income would represent contract income. Look for next month's article on common problems charities encounter while performing the public support test.
By Mark Sawchuk FEC Considers New Definition of Political Committee The Federal Election Commission recently issued an Advance Notice of Proposed Rulemaking requesting comments on a number of proposed revisions to the Federal Election Campaign Act (FECA)'s definition of "political committee" and the accompanying definitions of "expenditure" and "contribution." Unlike last summer's legislation-which increased reporting requirements for political organizations that qualify for tax exemption under Section 527 of the Internal Revenue Code-the FEC's proposed rules primarily target nonprofits recognized under different sections of the Code, including 501(c)(4)s. If adopted, the rules could force these organizations to register with the FEC as political committees, subjecting them to burdensome reporting and disclosure obligations. [See NN 7-8/00 for Section 527 legislation.] Under the FECA's current wording, a political committee is defined as any group of persons that receives more than $1,000 in (political) contributions or makes more than $1,000 in (political) expenditures during a calendar year. The FEC has proposed broadening the definitions of "contribution" and "expenditure" significantly. The result would be that nonprofits such as 501(c)(4)s that engage in certain election-related activities could be considered political committees. For example, the new definition of "contribution" would include anything of value from a political committee, a candidate controlled organization, or a Section 527 organization. In addition, the new definition of "expenditure" might include any general public political communication that refers to a candidate for federal office where the intended audience has been selected based on its voting behavior. This could create problems for advocacy organizations which frequently target grassroots lobbying messages to swing districts because legislators in these districts may be more responsive to their constituents. In addition, the FEC may incorporate the concept of an organization's "major purpose" into the definition of "political committee." In several opinions, the Supreme Court has stated that political committees only include organizations under the control of a candidate or "whose major purpose is the nomination or election of a candidate." The FEC has proposed several alternative tests for "major purpose" which would be broad enough to encompass a variety of nonprofits. For example, one alternative would establish a $50,000 threshold for political committee status. Any organization that spent more than this amount on election activities, including those involving express advocacy, would automatically be considered a political committee. The FEC's interpretation of "major purpose" is especially disturbing for (c)(4)s, whose electoral activities cannot constitute their "primary purpose" under the Internal Revenue Code but might be enough to constitute a "major purpose" under the new rules. Although the Commission voted 5-0 to promulgate the notice and accept public comments, it is unlikely that the FEC will actually revise the current regulations in the near future. The two Republican commissioners who voted indicated that they had reservations about supporting rules which might regulate groups that engage in issue advocacy or potentially threaten First Amendment rights. Furthermore, passage of the McCain-Feingold bill and decisions on the constitutionality of the provisions related to issue advocacy may influence the FEC's actions. Nevertheless, 501(c)(4)s and other exempt organizations that engage in political activities may want to comment on these rules, which can be found on the FEC's web site at www.fec.gov/pdf/FR66n45.pdf. Comments on the proposed rules should be sent before May 7th to the Federal Election Commission, Attention Rosemary C. Smith, 999 E Street, NW, Washington, D.C. 20463. Alternatively, you may e-mail your comments to polcomms@fec.gov with your full name and postal service address. By Mark Sawchuk Arbitration versus Litigation Increasingly, employers require employees to sign agreements to submit all employment-related claims to a neutral arbitrator, rather than to court. Employees who sign such agreements give up their legal right to sue and bring their claims for discrimination, breach of contract, and the like, to a judge or a jury. Instead, they agree that a neutral arbitrator will resolve all disputes with the employer. Many employers believe that arbitration resolves employment disputes more quickly, efficiently and inexpensively than litigation. In particular, employers like arbitration because arbitrators tend not to award very large damage awards in favor of either party. Employee advocates, on the other hand, tend to prefer to resolve these disputes in court, where juries occasionally award large verdicts against employers. Mandatory arbitration agreements also tend to favor employers by not permitting class actions, allowing the employer to choose the venue, and limiting rights to discovery and appeal. For a number of years, lawyers for employees and employers have been fighting about whether the Federal Arbitration Act allows employers to enforce an employee's signed agreement to submit all employment disputes to an arbitrator. In late March, the U.S. Supreme Court ruled 5-4 that such agreements are enforceable. The case, Circuit City Stores, Inc. v. Adams, arose when a former Circuit City employee in California brought suit for sexual orientation discrimination under California state laws. Circuit City asked the court to dismiss the lawsuit because the job application that the employee signed when he was hired stated that he agreed to settle all employment related disputes exclusively by way of final and binding arbitration before a neutral arbitrator. The trial court dismissed the case because the Federal Arbitration Act, which Congress passed in 1925 to compel judicial enforcement of certain arbitration agreements, required arbitration. The court of appeals disagreed, and reversed. The Supreme Court decision in favor of the employer resolved a split among Federal courts about whether employment agreements fell within the ambit of the Federal Arbitration Act. According to the Supreme Court, the language of the Act clearly included employment agreements. In addition, "Arbitration agreements allow parties to avoid the costs of litigation, a benefit that may be of particular importance in employment litigation, which often involves small sums of money than disputes concerning commercial contracts." In addition, if the FAA did not compel enforcement of the arbitration agreements, "the efficacy of alternative dispute resolution procedures adopted by many of the nation's employers" would be called into doubt. The Court also noted that arbitration agreements do not force parties to give up substantive rights, but only to resolve them in arbitration, rather than court. In order for arbitration agreements to be enforceable, they should include certain standards of fairness. Among other things, the decision-maker must be neutral and impartial; both parties must have a voice in the selection of the decision-maker; both parties must have the right to be represented by counsel, to at least some discovery about the facts of the other parties' case, and to cross-examine the parties' witnesses. The courts have yet to decide definitively how a fair arbitration program must be structured. It is expected that the Circuit City decision will lead to the proliferation of employers who require employees to sign mandatory arbitration agreements. By Ruth Eisenberg 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. Newsletter Home | HarmonCurran Home |