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Archives
January 2003
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| Election Connection |
Understanding the FEC's New Rules on Coordinated Communications |
Board Business |
An Ounce of Prevention: Audit Committees for Nonprofits |
| How To |
Update: Master Business License Deadline Extended
|
IRS Update |
Self-Correction of Excess Benefit Transaction |
Understanding the FEC's New Rules on Coordinated Communications
In the October 2002 issue of the Nonprofit Navigator, we alerted you to a proposed Bipartisan Campaign Reform Act (BCRA) rulemaking undertaken by the FEC to develop new regulations addressing communications that are coordinated with candidates or party committees. (For information on the genesis of the rulemaking, please see NN, 10/02.) The FEC has since finalized the regulations on coordinated communications, which are scheduled to take effect February 3, 2003. Organizations engaged in public advocacy will want to pay close attention to the new rules, which may be found in their entirety on the FEC web site .Why Coordination Matters
Expenditures for political communications directed to the general public that are coordinated with federal candidates have long been treated as in-kind contributions to those candidates (just like any other coordinated expenditure). Generally, individuals and federal PACs are permitted to make contributions to candidates subject to relatively low limits. Likewise, these persons may make coordinated communications, subject to the same limits. Corporations, however, are a different story. Because it is generally illegal for a corporation to contribute anything of value to a federal candidate or national party committee, corporations are accordingly also prohibited from making coordinated communications. Over the years, efforts to enforce the corporate ban on coordinated communications have bumped up against corporations' free-speech rights, resulting in a narrowing of the definition of coordination by both the courts and the FEC, which last published regulations in this area just two years ago. Supporters of BCRA argued those regulations were so restrictive that it made it all but impossible for the FEC to ever prove a communication was coordinated. As a result, BCRA tossed out the regulations and instructed the FEC to write new ones.
"Coordinated Communication" Defined
An expenditure for a communication may be an in-kind contribution for purposes of federal election law if it is coordinated with at least one of the following persons: a candidate, a candidate's authorized committee, a national, state or local political party committee, or an agent of any of the foregoing (for convenience throughout the remainder of this article, these persons will collectively be referred to as a "candidate or party"). Under the regulations, an "agent" is any person who has actual authority, whether express or implied, to engage in one or more specified activities related to communications on behalf of a candidate, an authorized committee, or a political party committee. For example, an agent of a candidate would include a person who is authorized by the candidate to request or suggest that a communication be created, produced or distributed. The regulations stress that agency is based on actual authority. Whether a person appears to be an agent of a candidate or committee is irrelevant.
The Three-Prong Test
Three factors must be present before a communication will be deemed a "coordinated communication." First, the communication must be paid for by someone other than the candidate or party with whom it is coordinated. Second, it must contain certain content. And third, there must be certain conduct associated with the creation, production or distribution of the communication. The first factor–payment of the communication by a third party–is not difficult to grasp. The standards making up the content and conduct prongs of the test are, however, more complicated.
The Content Standards
The content standards were developed to ensure there is a sufficient election-related component to any coordinated communication so as to justify its regulation. While there are technically four distinct kinds of communications that satisfy the content prong of the coordination test, one stands above the others in terms of its significance to incorporated nonprofits seeking to avoid coordination. This would be a "public communication" that (1) refers to a clearly identified federal candidate or political party; (2) is broadcast or disseminated 120 days or fewer before a general election, primary, caucus or convention; and (3) is directed to voters in the jurisdiction of the clearly identified candidate or to voters in a jurisdiction in which one or more candidates of the referenced party appear on the ballot.
The phrase "public communication" has a special meaning under the regulations. It is a communication made via any broadcast, cable or satellite communication, newspaper, magazine, billboard, mass mailing (500 or more substantially similar pieces of mail sent within a 30-day period), phone bank (500 telephone calls of a substantially similar nature within a 30-day period), or any other form of general public political advertising. Importantly, a communication sent over the Internet, such as one posted on a Web site or sent by mass e-mail (regardless of the number of recipients), is not a "public communication" under the regulations. Thus, an advertisement placed in a newspaper circulated within a congressional district in which a Democratic candidate for Congress appears on the ballot that calls on readers to support the legislative agenda of the Democratic Party would satisfy the content standard if the ad were to appear within four months of either the primary or general election. The same communication sent via e-mail, however, would not meet the standard.
Other communications that meet the content prong of the coordination test include "public communications" that either (1) expressly advocate the election or defeat of a clearly identified candidate or (2) disseminate, distribute, or republish, in whole or in part, campaign materials prepared by a candidate, a candidate's committee, or an agent of either. Nevertheless, because corporations are already generally prohibited from paying for these kinds of communications, it typically does not matter whether they constitute "coordinated communications." A notable exception to this conclusion is in the case of certain qualifying 501(c)(4)s commonly known as "MCFL" organizations, which may engage in express advocacy so long as there is no coordination.
Finally, an "electioneering communication," which was the subject of a previous BCRA rulemaking [see NN, 11/02], will also meet the content standard. This is not surprising because such communications already fall under the "120-day" content standard described above.
The Conduct Standards
The final element of the three-prong test requires that at least one of the following five types of specific conduct be present.
- Reguest, Suggestion or Assent
- Material Involvement
- Substantial Discussion
- Common Vendor
- Former Employee or Independent Contractor
- Safe Harbor
The communication is created, produced, or distributed either at the request or suggestion of a candidate or party or after a candidate or party has assented or agreed to the communication. Since an otherwise independent communication could become coordinated simply by the expression of a candidate that the communication is a good idea, corporations will need to be cautious when it comes to sharing their plans for public communications with candidates, parties, or their agents. Importantly, requests or suggestions made by a candidate to the public generally do not count. Thus, if a candidate were to mention in a public campaign speech that the environmental community should attack her opponent's record on clean water, and an organization sets up a phone bank to do just that, the organization will not have made a coordinated communication.
A candidate or party is materially involved in decisions regarding the content of the communication; its intended audience; the means or mode of the communication; the specific media outlet used for the communication; its timing or frequency; or the size, prominence, or duration of the communication. For example, if a candidate shares his campaign's polling results with an organization that uses the information to select the audience for a communication it is planning, the candidate will be considered to be materially involved in the communication.
The communication is created, produced, or distributed after substantial discussion about the communication between the person who is paying for it (or that person's agent) and the clearly identified candidate appearing in the communication, his or her opponent, or a party. A discussion is considered substantial "if information about the candidate's or political party committee's plans, projects, activities, or needs is conveyed to a person paying for the communication, and that information is material to the creation, production, or distribution of the communication." The FEC's previous coordination regulations required agreement or formal collaboration between the parties. This is no longer the case.
The presence of three factors are required to satisfy this conduct standard. First, the communication must be created, produced or distributed by a commercial vendor. Second, within the current election cycle, the vendor must provide one or more specified services to the candidate who is clearly identified in the communication, his or her opponent, or a party (this makes the vendor a "common vendor"). Since the current election cycle starts the day after the prior election for the particular office, the current election cycle for the Senate is six years long and in some cases started back in 1998. The specified services include the developing media strategy, selecting or purchasing advertising slots, fundraising, and providing political or media advice, among others. Third, the common vendor must either use or convey to the person paying for the communication information about the candidate or committee's plans, projects, activities, needs, or even information the vendor used previously in providing services to the candidate or committee, that is material to the creation, production, or distribution of the communication. Because it is not necessary for the vendor to share information with the person paying for the communication, organizations engaged in public advocacy will likely want to carefully consider their vendor relationships in cases where they are making communications that satisfy any of the content standards.
First, the communication is paid for by a person, or by the employer of a person, who, during the current election cycle, was an employee or independent contractor of the candidate who is clearly identified in the communication, his or her opponent, or a party. Second, that former employee or independent contractor either uses or conveys to the person paying for the communication information about the candidate or committee's plans, projects, activities, needs, or information used by the former employee or independent contractor in providing services to the candidate or committee, that is material to the creation, production, or distribution of the communication. Significantly, the FEC did not include volunteers within the scope of this standard.
A candidate or party's response to oral or written inquiries about the candidate or party's positions on legislative or policy issues will not satisfy any of the conduct standards. However, in order for this safe harbor to apply, there can be no discussion of campaign plans, projects, activities or needs of the candidate or party.
While the primary focus of these regulations is on coordinated communications, they also redefine and implement additional reporting requirements for independent expenditures. An independent expenditure is simply an expenditure for a communication that expressly advocates the election or defeat of a clearly identified candidate (thus satisfying one of the content standards) that is not a "coordinated communication." In addition to the pre-BCRA requirement of filing a 24-hour notice each time disbursements for an independent expenditure total $1,000 during the 20 days preceding an election, persons making independent expenditures must file similar notices within 48 hours each time their independent expenditures aggregate $10,000 or more up to and including the 20th day before an election. Because corporations are generally prohibited from making independent expenditures, the reporting requirements are of interest primarily to PACs, individuals, and special 501(c)(4) organizations that qualify for "MCFL" status because they do not engage in business activities or accept contributions from business corporations or labor organizations.
By Paul J. Murphy
An Ounce of Prevention: Audit Committees for Nonprofits In the era of increased corporate scrutiny, audit committees may play an increasingly important role for not-for-profit corporations. An effective audit committee helps identify and correct financial weaknesses in financial systems, thereby assuring donors of fiscal responsibility, and helping an organization maintain its good reputation.
In 2002, Congress passed corporate accountability legislation that in part calls for business corporations to create audit committees. While not required by law, nonprofits may want to consider creating audit committees to periodically review the corporation's finances and financial systems. An audit committee can provide critical information to the Board of Directors, which continues to exercise ultimate decision-making authority and responsibility. Of course, each organization must tailor its own committee's structures and procedures to its unique needs.
Preferably, the audit committee will be comprised of directors, and, to ensure independence, should not include the CEO, CFO, or other senior managers. At least one director should have financial expertise. Smaller nonprofits may find it difficult to create an audit committee possessing financial expertise without the executive officer or the executive financial officer, but larger nonprofits should try to add such skills to this oversight body. Even small nonprofits may benefit from an audit committee that reviews the organization's control procedures and basic separation of duties so that no one person has exclusive financial control.
Any director serving on the audit committee should be well informed of the financial reporting process employed by the organization and the reasons for employing particular practices. However, the members of the audit committee should also be inquisitive and objectively critical of the organization's financial reporting process and decisions.
There are other aspects of the nonprofit's finances the audit committee should understand in order to thoroughly evaluate and disclose the organization's overall financial situation. For example, the audit committee must fully understand the organization's conflict of interest and compensation policies, and the financial relationship, if any, between officers and directors who may provide services to the organization (such as in the areas of law and fundraising).
Equally important is understanding the laws imposing restrictions and limitations on tax-exempt organizations. The IRS has specific regulations governing nonprofits, including rules particular to public support for charities and lobbying expenditures. An audit committee should review the organization's efforts to comply with these regulations.
In addition, sources of financial support including donations, membership, fundraising, investments, and government funding, must be accounted for and disclosed appropriately. While it is understandable that many nonprofits operate with some uncertainty of the type and amount of funding from year to year, the audit committee should carefully examine the ways in which these uncertainties are accounted for in the budget and annual reports. For example, an audit committee might raise questions about a charity's mechanism for turning pledges into actual donations, especially if the charity depends on pledges as the major source of financial support.
Finally, the audit committee should oversee internal accounting practices, and the periodic process of external audits. Well-designed financial systems can reduce the cost of independent audits. A familiar adage states, "An ounce of prevention is worth a pound of cure." The increased attention on corporate abuses in the for-profit world acts as an important reminder to the nonprofit sector to exercise careful financial stewardship. A nonprofit's creation of an audit committee may provide the extra edge of oversight needed to protect the organization's finances and its reputation.
By Miguel de Baca
Master Business License Deadline Extended
The DC Department of Consumer and Regulatory Affairs (DCRA) announced in
late December that the deadline for obtaining a Master Business License (MBL) has been
extended to May 31, 2003. This is the second deadline extension in the MBL program,
which is designed to streamline business licensing in DC.
All businesses located in the District- including nonprofits- must
file for an MBL if their annual gross receipts exceed $2,000. Most nonprofits
are required to obtain a charitable solicitation registration along with the MBL
[see NN, 11/02]. More information about the MBL program, as well
as applications and other forms, are available at the DCRA web
site http://www.dcra.dc.gov/main.shtm.
By Amy Licht
Self-Correction of Excess Benefit Transactions
While details of the formal voluntary compliance program are still under wraps, the IRS has announced a "safe harbor" for organizations and disqualified persons who promptly and voluntarily self-correct excess benefit transactions.
Under IRS regulations, the excise tax may be abated if an excess benefit transaction is corrected before 90 days after the IRS mails a notice of deficiency to the organization or implicated disqualified person AND the excess benefit is shown to be due to "reasonable cause" and not "willful neglect."
Under the announced safe harbor, if a disqualified person corrects an excess benefit transaction within thirty (30) days after he or she "discovers or acquires actual or constructive knowledge" that it was an excess benefit transaction, then the IRS will deem it to be a result of reasonable cause and not of willful neglect, and thus not subject to intermediate sanctions. The safe harbor only applies if the disqualified person discovers (or acquires constructive knowledge of) the excess benefit transaction before the organization or the disqualified person receives notice from the IRS scheduling an audit relevant to the transaction. All excess benefit transactions, even those corrected under the new safe harbor, must be disclosed on the Form 990.
If the disqualified person or organization self-corrects the transaction after those thirty (30) days, then the IRS will temporarily suspend the excise tax until all of the facts and circumstances of the correction are weighed. If the IRS determines that the corrected transaction was a result of reasonable cause, then the excise tax will not be levied.
The announcement of the safe harbor suggests that the IRS is trying to emphasize voluntary compliance over tax collections. However, one of the stickiest issues raised by the intermediate sanctions rules is how to determine what is and is not an excess benefit transaction. Because the 30-day safe harbor requires the disqualified person to identify an excess benefit transaction before receiving notice from the IRS, the safe harbor does not help with the definitional problem. On the other hand, the safe harbor should encourage organizations to reevaluate borderline transactions, and discourage them from trying to sweep these suspect transactions under the rug.
By Miguel de Baca and Paul J. Tanis
IRS Issues 2003 Inflation-Adjusted Rates
The IRS has released inflation-adjusted figures for the 2003 tax year,
which will be of interest to individuals and nonprofit organizations.
Low Cost Article
The unrelated business taxable income of certain exempt organizations does not include
proceeds from the distribution of "low cost articles" in connection with charitable
solicitations. For tax year beginning in 2003, a "low cost article" is any article which
costs $8 or less.
2002: $7.90
2003: $8
Other Insubstantial Benefits
The IRS established guidelines in Rev. Proc. 90-13 to provide charitable organizations
with help in advising their patrons of the deductible amount of contributions when
the contributors are receiving something in return for their contributions. The original
guidelines state that the value of benefits received by a donor in return for a fully-deductible
charitable contribution may be disregarded if either: 1) for a contribution of $25 or more,
the contributor did not receive something in return that costs more than $5
(or the rate for a "low cost article" listed above); or 2) the fair market value of
all of the benefits received in connection with the payment is not more than 2 percent
of the payment or $50, whichever is less. The $5/$25/$50 schedule is annually adjusted for
inflation and this year has been increased to $8, $40, and $80, respectively.
2002: $7.90 / $39.50/ $79
2003: $8 / $40 / $80
Mileage
The standard mileage deduction rate for business use of an automobile has decreased
to 36 cents/mile. The figure for volunteer or charity work remains at the 14 cents/mile
rate in effect last year.
2002: 36.5˘/mile
2003: 36
Reporting Exemption for Lobbying Expenditures
Rev. Proc. 98-19 set at $75 or less -- annually adjusted for inflation – the amount of
annual dues that social welfare organizations may receive without becoming subject
to I.R.C. § 6033(e). Section 6033(e) requires a tax-exempt organization that incurs
nondeductible lobbying expenditures to notify its members, at the time the dues are
assessed or paid, of its reasonable estimate of the portion of the dues that is allocable
to those expenditures. In 2003, the annual dues limitation to qualify for the reporting
exception regarding certain exempt organizations with nondeductible lobbying expenses is
$85 or less.
2002: $83
2003: $85
Non-Member Dues
In 2003, dues paid by an individual to 501(c)(5) agricultural and horticultural
organizations and 501(c)(6) organizations will not be subject to UBIT provided
they do not exceed $122.
2002: $120
2003: $122
Annual Exclusion for Gifts
The first $11,000 of gifts to any person (other than gifts of future interests in property)
is not included in the total amount of taxable gifts made during that year. This rate remains
the same as the previous year.
2002: $11K
2003: $11K
Itemized Deductions
The income threshold for the overall limitation on itemized deductions,
which rises slightly each year, has risen to $139,500 for married couples filing jointly,
or $69,750 for married individuals filing separately. The allowable amount of deductions
is reduced for taxpayers with adjusted gross income above that amount.
2002: $137.3K
2003: $139.5K
By Amy Licht
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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