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February/March 2004
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Armageddon is Next Month: FEC issues narrow ruling, defers hard questions for pending rulemaking In response to the restrictions placed on political party activities and fundraising by the Bipartisan Campaign Reform Act ("BCRA"), a number of independent section 527 political organizations were organized to run candidate advocacy and voter mobilization efforts. On February 18, the FEC took its first step to regulate these non-party 527 organizations by approving Advisory Opinion ("AO") 2003-37. The initial draft of this opinion submitted by the FEC's Office of General Counsel caused alarm in a wide segment of the nonprofit community because of its broad wording. The draft proposed that "expenditures" should include payments for any communication that "promotes, supports, attacks or opposes" a clearly identified federal candidate. Obviously this might cover a wide range of nonprofit advocacy far beyond that generally thought to lie within the sweep of FEC regulatory authority. Even 501(c)(3) lobbying messages might be read to support or oppose the policy position taken by an officeholder who is also a candidate for office, such as the President. Under the logic of the initial draft, the FEC could potentially require that all such communications be paid for with PAC funds. The opinion as finally approved retained this "promotes, supports" standard, but clearly stated that it was limited to the specific circumstances of the request. That is, this new definition of "expenditure" applies only to FEC-registered nonconnected political committees (PACs). The ruling expressly states that it "does not set forth general standards that might be applicable to other tax-exempt entities." Thus, the immediate effect of the opinion will be felt only by stand-alone 527 organizations that have registered with the FEC as political committees. However, the legal basis for applying one definition of "expenditure" to registered political committees and another to 501(c) organizations is shaky at best. The AO creates something of an anomaly. "Expenditures" are defined differently for political committees and other organizations, yet making expenditures is itself one of the actions that trigger political committee status. If an organization is not a self-identified PAC, what definition will be used to determine if it is one? The answer to this and other open questions is likely to come soon. In early March, the FEC will begin a rulemaking process to systematically examine the rules that apply to outside advocacy groups. While the AO avoided any pronouncement that directly affected 501(c) groups, it stated plainly that "The Commission will address the legal status of such organizations [operating under section 501(c)(3) and section 501(c)(4) of the Internal Revenue Code] in a rulemaking this Spring." Hence the half-humorous remark of FEC Commissioner Mason in response to the hundreds of nonprofits that signed onto comments objecting to the original draft of AO 2003-37: observing that many of the comments received cast this ruling as "almost Armageddon," he suggested, "I actually think Armageddon is next month when we do the rulemaking." Proposed regulations will be discussed at a meeting on March 4, and probably published soon after that in the Federal Register. They will also be posted at http://www.fec.gov/register.htm. After a 30-day period for public written comments, the Commission will hold a hearing (planned for April 14 or 16) and complete final rules by Thursday, May 13. Even if any rules eventually adopted apply only to 527 organizations, other nonprofits may well be concerned about what might happen next. Once a rule is put in place for one set of organizations, it is only a short step to apply it to others. We saw, for instance, the Supreme Court hold that "promote, support, attack or oppose" was not an unconstitutionally vague standard when BCRA applied it to political party committees. Now, a short time later, the FEC has applied it to govern activities of PACs that are not connected with candidates or parties, even though the statute did no such thing. In short, there will be a lot going on at the FEC this spring that the nonprofit community would do well to keep a close eye on. By Elizabeth Kingsley   New IRS CPEs offer guidance on fraternal organizations and "automatic" excess benefit transactions The IRS recently issued two new Continuing Professional Education articles, one addressing 501(c)(8) and (c)(10) fraternal organizations, the other "automatic" excess benefit transactions under IRC 4958. These articles are designed for IRS use, but are made public to help individuals and practitioners understand how various organizations and transactions are evaluated. The first article summarizes and clarifies the requirements for obtaining and maintaining 501(c)(8) and (c)(10) fraternal organization status. The article includes:
The second article discusses when income and wages should be treated as "automatic" excess benefit transactions under IRC 4958. The article covers:
By Eric Tars Walking the Line Between Issue Advocacy and Electioneering Just in time for a campaign year that is projected to break records for paid media advertising, the IRS has released Revenue Ruling 2004-6. The ruling provides useful guidance on when public advocacy communications by tax-exempt organizations will be deemed to be influencing an election. The revenue ruling applies specifically to nonprofits that are tax exempt under sections 501(c)(4), 501(c)(5), and 501(c)(6) of the Internal Revenue Code (social welfare organizations, labor unions, and trade associations, respectively). Section 527 of the Code requires these organizations to pay a tax on the lesser of their expenditures to influence elections ("exempt function" expenditures) or their net investment income. While the ruling does not specifically address communications by section 501(c)(3) public charities, its guidance is useful to them. IRS personnel have consistently stated that a communication that qualifies as an exempt function under section 527 generally would also be considered to be a prohibited political campaign communication under section 501(c)(3). The revenue ruling sets forth a number of facts and circumstances that the IRS considers most relevant to a determination of whether or not an advocacy communication on a public policy issue crosses the line into political advocacy. A communication that expressly advocates for the election or defeat of a candidate for public office clearly serves the function of influencing that candidate's election. When a communication does not contain express advocacy, the IRS will review all of the facts and circumstances surrounding the communication to determine whether it is for an exempt function. According to the ruling, a non-exhaustive list of factors that tend to show an advocacy communication influences an election includes the following: • The communication identifies a candidate for public office; • The timing of the communication coincides with an electoral campaign; • The communication targets voters in a particular election; • The communication identifies that candidate's position on the public policy issue that is the subject of the communication; • The position of the candidate on the public policy issue has been raised as distinguishing the candidate from others in the campaign, either in the communication itself or in other public communications; and • The communication is not part of an ongoing series of substantially similar advocacy communications by the organization on the same issue. Some of the factors that tend to show an advocacy communication on a public policy issue does not serve to influence an election are: • The absence of any one or more of the factors listed above; • The communication identifies specific legislation, or a specific event outside the control of the organization, that the organization hopes to influence; • The timing of the communication coincides with a specific event outside the control of the organization that the organization hopes to influence, such as a legislative vote or other major legislative action (for example, a hearing before a legislative committee on the issue that is the subject of the communication); • The communication identifies the candidate solely as a government official who is in a position to act on the public policy issue in connection with the specific event (such as a legislator who is eligible to vote on the legislation); and • The communication identifies the candidate solely in the list of key or principal sponsors of the legislation that is the subject of the communication. To help explain how the presence of certain facts and circumstances determines whether an advocacy communication results in a political expenditure, Revenue Ruling 2004-6 analyzes six different hypothetical situations. All six fact patterns share three factors from the list of those that tend to show a communication is for an exempt function: (1) the communication identifies an officeholder who is also a candidate for public office, (2) the communication appears shortly before that candidate's election, and (3) the communication is targeted to the voters in the election. The ruling therefore highlights the role of the other factors in evaluating "close calls" for many organizations that continue to advocate for their causes during campaign season. For example, in one scenario, the IRS determines that an advocacy communication is not a political expenditure in part because the advertisement is one of a series of substantially similar communications on the same issue and the communication identifies an event outside the control of the organization that it hopes to influence. In another, the fact that a communication is timed to appear shortly before a vote on legislation that is the subject of the communication is important to the determination that it is not for an exempt function. Interestingly, all of the advocacy communications in the six fact patterns include a solicitation for donations to the organization, suggesting that whether the purpose of the communication is in part to raise funds is irrelevant to a finding of whether or not it influences an election. The revenue ruling is particularly helpful to those organizations that regularly attempt to influence legislation by means of grassroots lobbying–asking the general public to contact their elected officials with respect to a pending legislative initiative–as it provides the clearest guidance yet on how to avoid making those communications political expenditures. The ruling does note, however, that even if a communication does not constitute an exempt function as defined by the tax code, it could still qualify as an electioneering communication under the Bipartisan Campaign Reform Act [see NN 11/02]. Corporations, including incorporated 501(c)(4), (c)(5), and (c)(6) organizations, are generally prohibited from making electioneering communications, but 501(c)(3) public charities are exempt from the prohibition. By Paul J. Murphy 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 |