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July/August 2002
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Update: FEC Publishes Final Rules on Soft Money Regulation The Federal Election Commission recently finalized its first set of regulations designed to implement the Bipartisan Campaign Reform Act (BCRA). These regulations, which were initially proposed by the FEC in May 2002 [See NN, 05/02], address those parts of BCRA aimed at reducing the impact of "soft money" on Federal elections. BCRA accomplishes this, in part, by restricting fundraising by political parties and federal candidates and officeholders on behalf of nonprofits that are active in federal elections. Unless disapproved by Congress or the courts, the regulations will become effective after November 5, 2002. They can be found in their entirety at http://www.fec.gov/register.htm. Restrictions on Politicians Fundraising for 501(c)s BCRA's "soft money" provisions, while primarily directed at national and state parties, limit the ability of federal candidates and officeholders to fundraise for 501(c) organizations. Nevertheless, federal candidates, officeholders, and their agents may continue to assist 501(c) organizations in several ways. Prohibition on Political Parties Fundraising for Politically Active Non-Profits While federal candidates and officeholders face limitations on raising funds for 501(c) organizations active in federal elections, political parties are absolutely prohibited from doing so. Specifically, political parties (whether national, state, or local), their officers and agents, and any entity they establish, finance, maintain, or control, may not solicit, direct, or make donations to any 501(c) organization that spends any of its resources in connection with federal elections, including "Federal election activity." Nevertheless, they may respond to a request for information about a tax-exempt group that shares the party's political or philosophical goals. As in the case of federal candidates and officeholders, political parties may rely on a certification from an organization that it has not made nor intends to make any expenditures or disbursements in connection with a federal election during the current election cycle and that it does not intend to pay debts so incurred in a prior election cycle. What is "Federal Election Activity"? As discussed above, the phrase "in connection with a federal election" is not defined by the regulations. However, it always includes "Federal election activity," which the regulations do define. A nonprofit organization engages in "Federal election activity" if it participates in any of the following: "Established, Maintained, Financed, or Controlled" As noted above, the BCRA restrictions on political parties, including the ban on contributions to 501(c) organizations, also apply to any entity that is "established, maintained, financed, or controlled" by such party committees. One of the most controversial provisions in the final rules includes a "safe harbor" clause that sets November 6, 2002, as the date from which entities will be determined to be "established, maintained, financed, or controlled" by a political party. Even if an organization is created by and receives funds from a political party before November 6, 2002, its relationship to that political party will be analyzed solely on facts from November 6th forward, so long as the party-derived funds are disposed of prior to that date. Reformers calling for Congress to overturn the final rules believe this provision will permit the national parties to create shadow groups that will be able to raise and spend unregulated soft money in connection with federal elections, something the parties will no longer be able to do themselves. Actual versus Apparent Authority: "Agency" Clarified The regulations restricting the activities of federal candidates, officeholders, and parties apply to their agents as well. Thus, the definition of "agent" is critical to whether a party, candidate or officeholder can be held liable for another's acts. The regulations define an agent of a federal candidate or officeholder as anyone who has actual authority, either express or implied, to solicit, receive, direct, transfer or spend funds in connection with any federal election on behalf of that candidate or officeholder. In the case of a party committee, agents include those persons actually authorized to solicit funds for or direct donations to 501(c) organizations. Reformers decry the FEC's decision to exclude individuals with "apparent" authority from the definition of agent. Restricting the definition of "agent" to a person who is acting on behalf of a principal with respect to a particular transaction allows the same person to hold positions with more than one entity. For example, a well-known volunteer of a politically active 501(c)(4) who is also a high-ranking official of a state party committee can still raise funds for the (c)(4) without violating BCRA, so long as he or she is acting on behalf of the (c)(4) and not the party. All Is Not Said Nor Done While the new regulations are slated to take effect as soon as the upcoming mid-term elections are over, there is no guarantee they will operate for long, if ever. All aspects of BCRA are currently being challenged before a special three-judge panel of the U.S. District Court of the District of Columbia, including the "soft money" provisions upon which the regulations are based. Many believe the U.S. Supreme Court will weigh in on the legislation as early as next Spring. More immediately, some are calling on Congress to overturn the new regulations while they are still within a thirty-legislative-day window of disapproval. By Miguel de Baca and Paul Murphy   Businesses Injured by Sept. 11 Owe No Tax on Charitable Grants In a reply letter to the American Bar Association (ABA), the IRS determined that for-profit businesses sustaining damages from the attacks of September 11 are permitted to exclude disaster assistance from their taxable income. Typical donations were made for the replacement of damaged or destroyed property (e.g., pushcarts in the case of street vendors), relocation or reconstruction expenses outside of lower Manhattan, or meeting payroll expenses for businesses experiencing significant loss of trade. It is well understood that an individual's taxable income does not include gifts. The IRS had never before confronted whether a business' income includes charitable donations. "Donative intent" is the IRS standard for deeming whether a grant from a charitable organization is taxable income. That is, the IRS examines the motivations behind the grant to determine whether it is taxable. The IRS letter reiterates its elements. The standards are four-pronged. First, the donation must come from the organization's "detached and disinterested generosity." Second, the grantor must make the donation out of "affection, respect, admiration, charity, or like impulses." Third, the gift must not be given out of legal obligation to the for-profit, or the anticipation of any type of economic benefit. And finally, the gift must not be a payment for any type of service rendered. To prevent the abuse of double tax benefits, the IRS points out that the businesses may not use these "gifts" to generate tax deductions. For example, if the charitable gift, which is excluded from taxable income, was used to pay salaries, that salary payment is not deductible. The IRS urges 501(c)(3) charities to be cautious in their giving and meticulous in their selection of worthy for-profit organizations to which they make grants. These grants must wholly further charitable purposes. It is assumed that the charity will examine a for-profit's operations and losses before providing support. Additionally, the IRS expects the 501(c)(3) to keep track of the grant within the financial operations of the for-profit, and ensure that the funds are used for intended purposes. By Miguel de Baca Advocacy Organizations Take Notice: FEC Proposes Rulemaking on Electioneering Communications (a.k.a. Issue Ads) The Federal Election Commission has published a Notice of Proposed Rulemaking aimed at implementing the Bipartisan Campaign Reform Act's (BCRA) provisions on electioneering communications. [See NN, 03/02] BCRA defines an "electioneering communication" as any broadcast, cable or satellite communication that: 1) refers to a clearly identified federal candidate; 2) is made within 60 days before a general, special, or runoff election or 30 days before a primary, caucus or convention; and 3) if the candidate is running for Congress, is targeted to the relevant electorate. BCRA states that an ad is "targeted" if it can be received by 50,000 or more individuals in the congressional district or state in which the House or Senate candidate, respectively, is running for office. Corporations, including incorporated non-profits, and unions are prohibited from making electioneering communications. Individuals, unincorporated entities, and federal PACs are generally permitted to make electioneering communications, but must report their expenditures and contributions to the FEC once an aggregate spending threshold of $10,000 has been exceeded. While nothing is set in stone, a number of the proposed regulations would limit the impact of the electioneering communication prohibition imposed on incorporated nonprofit organizations. For example, special 501(c)(4) organizations known as "qualified nonprofit corporations" (a.k.a. "MCFL" organizations), which are already permitted to make independent expenditures expressly advocating the election or defeat of a federal candidate, would be exempt from the electioneering communication prohibition. The FEC is also considering additional exceptions with respect to grassroots lobbying communications. While the FEC has not proposed specific regulations, it has requested comments on whether BCRA can be interpreted to allow incorporated 501(c)(4)'s and 527 organizations to make electioneering communications that refer solely to presidential or vice-presidential candidates using funds that do not come from corporations, labor organizations or foreign nationals. Organizations that regularly air issue ads or grassroots lobbying communications during election years may want to take this opportunity to share their views with the FEC prior to the regulations becoming final. Supporters of BCRA will likely use the comment period to argue that the corporate prohibition on electioneering communications should be interpreted broadly. Once approved, the regulations are scheduled to take effect November 6, 2002. Persons wishing to testify at public hearings to be held on August 28th and 29th must submit their comments and requests to testify to the FEC no later than August 21st. Anyone wishing to file only written comments has until August 29th. Comments can be filed in electronic or written form and should be addressed to Ms. Mai T. Dinh, Acting Assistant General Counsel. Written comments should be sent to Federal Election Commission, 999 E Street, NW, Washington, DC 20463. Electronic comments are particularly encouraged by the FEC and should be sent to Electioneering@fec.gov. Electronic comments must include the commentator's full name, e-mail address, and postal service address to be considered. All comments will eventually be posted on the FEC's Web site at http://www.fec.gov. By Paul Murphy Knock Knock: Supreme Court Limits Regulation of Door-To-Door Advocacy A Jehovah's Witnesses organization recently won a case in the U.S. Supreme Court challenging a village ordinance that required all door-to-door advocates, including representatives of cause-related, political and religious groups, to register and obtain permits from the village government. The case, Watchtower Bible and Tract Society of New York, Inc. v. Village of Stratton, affirms that door-to-door advocacy and pamphleteering may not constitutionally be restricted. The Stratton ordinance required all door-to-door canvassers, solicitors, vendors and the like to file registrations containing various information including the name and address of the canvasser, a description of the organization or cause, and the specific address of each private resident that the registrant intended to canvass. The village argued that the ordinance was properly framed to prevent fraud and other crime, as well as protect residents' privacy. The Court disagreed by an 8-1 vote, holding that the ordinance was written more broadly than necessary to serve those legitimate government interests. As such, the registration requirement impermissibly deterred religious and political discourse, two areas of speech that receive the highest First Amendment protection. This decision means that the government cannot compel door-to-door canvassers who engage solely in advocacy and education to register, but it does not rule out all regulation of door-to-door activity. Although the Court did not directly decide the matter, it indicated that a portion of the village ordinance that allowed property owners to exclude canvassers by posting their property with signs that read "No Solicitation" was constitutionally permissible. Also, the decision does not protect commercial activities; organizations that actively solicit contributions or sales on a door-to-door basis may still be required to obtain permits under state or local laws. Finally, the Court has previously held that circulation of petitions in favor of ballot initiatives and candidates may be subject to limited regulation. By Paul Tanis Virginia Allows Nonprofits to Give Notice and Vote Via E-Technology Virginia is the latest state to join the e-revolution and allow nonprofits to use electronic transmissions for participation in some aspects of corporate governance. Recently enacted legislation, effective July 1, 2002, allows members to vote, and directors and members to receive notification of meetings by use of electronic transmissions in certain instances. Essentially, an electronic transmission is any form of communication that does not involve the physical transfer of paper, and creates a record that may be reproduced in paper form. Electronic transmissions include e-mail and Web Board postings. The statute identifies two situations when nonprofits can now use electronic transmissions. First, organizations can send notice of meetings to members and directors through e-communication once the recipient has consented to such notification. Second, when authorized by the Board, members can participate in voting procedures by electronic means. For example, a member can cast a ballot and designate a proxy through an e-mail message, in place of a written authorization. While the legislation opens up possibilities for the use of electronic communication by nonprofits, it also imposes certain restrictions. These include: In addition to the rules on member voting, organizations should note that the law is more restrictive toward directors. In particular, while members are permitted to cast votes by e-communications, directors are prohibited from doing so. Consequently, directors are still required to vote by traditional means. In passing this legislation, Virginia joins a handful of other states, including Maryland, Delaware [see NN, 03/01] and D.C. [see NN, 09/00], that have made electronic transmissions a legal means to satisfy voting and notice requirements. However, the state-to-state differences in legislation are notable. For example, in D.C. and Virginia members are allowed to vote by e-communication, while members in Maryland are not. Also, while directors in Virginia are restricted from voting by e-communication, directors in Delaware are permitted to do so. While the provisions in each state are not identical, their overriding effect is to allow corporations to expedite their internal business through the use of electronic communication. By Amy Licht Update: Master Business License Grace Period Extended An August 7, 2002 press release from the District of Columbia Department of Consumer and Regulatory Affairs (DCRA) states that the grace period for obtaining a Master Business License (MBL) has been extended. The new deadline for all businesses within the DC commercial zones is December 31, 2002. Home-based businesses within DC residential zones have until February 28, 2003 to file. All businesses – for-profit or nonprofit – must obtain an MBL if their gross receipts total $2,000 or more in a year. The MBL is an effort by DCRA to streamline the operation and regulation of businesses in the District of Columbia. For information on the MBL or where to obtain forms visit the Master Business License section of this website, call (202) 442-4311, or email mbl.infocenter@dc.gov. By Miguel de Baca 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 |