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March 2002
SPECIAL ELECTION LAW ISSUE
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Shays-Meehan Bill Could Mean Big Changes for Advocacy Groups On March 27, President Bush signed the Bipartisan Campaign Reform Act of 2002, commonly known as the "Shays-Meehan" or "McCain-Feingold" bill. These bills became viable because of growing concern that loopholes in campaign finance laws enable wealthy special interests to influence the political process. When it goes into effect on November 6, 2002, the new law will alter the Federal Election Campaign Act (FECA) more dramatically than any legislation or court case since 1976's Buckley v. Valeo. Depending on pending litigation, these amendments will have an enormous impact on nonprofit advocacy groups, notably 501(c)(4)s and 527 organizations. Even 501(c)(3) public charities that lobby may be affected by the new law. Senator Mitch McConnell (R-Ky) and the NRA each filed suit against Shays-Meehan as soon as President Bush signed the bill into law. The litigation attacks the bill's restrictions on issue ads and its prohibitions on soft money as unconstitutionally burdening the First Amendment right to free speech. Because Shays-Meehan provides for expedited Supreme Court review of such challenges, decisions could be handed down even before the law takes effect. Soft and Hard Money Limits The Shays-Meehan bill is primarily concerned with regulating the unlimited amounts of "soft" money that corporations, unions, and wealthy individuals have been able to donate to national political parties and their affiliated organizations. Soft money can be used for issue advocacy (see below) and other activities that may influence federal elections. Shays-Meehan imposes a total ban on soft money contributions from any source to the national political parties and their congressional campaign committees. It permits soft money contributions to state, district, and local political parties of only $10,000 per source for limited, generic voter registration and "Get-Out-The-Vote" (GOTV) activities. Under the new law, officeholders and candidates may continue to raise funds for voter registration and GOTV drives by nonprofits, but such contributions may only be from individuals and are limited to $20,000 per donor. They are also permitted to raise unlimited amounts of money for nonprofits as long as the solicitation is not specifically for federal election activity. At the same time, Shays-Meehan modifies many longstanding hard money contribution limits, often confusingly. The maximum aggregate amount an individual can contribute to candidates, national and state political parties, and PACs rises from the current $25,000 per year to $95,000 per two-year election cycle. The two-year election cycle starts on January 1 of odd-numbered years and ends on December 31 of even-numbered years. Within this two-year cycle, an individual may contribute a total of $37,500 to candidates and up to $57,500 to the national party committees and federal PACs combined, with another internal cap of $37,500 on PAC contributions. Within the aggregate limits, individual contribution limits have also changed. The amount an individual can contribute per candidate per election doubles to $2,000; and the bill's "millionaire exception" increases this limit for House and Senate candidates if they face opponents who use large amounts of personal funds to finance their campaigns. While the yearly contribution limit to a single PAC remains $5,000, the amount an individual can give each year to a national political party rises from $20,000 to $25,000. Permitted yearly contributions to the federal account of a state party committee also increases to $10,000, up from the current limit of $5,000. Finally, children under eighteen will no longer be permitted to make contributions. Restrictions on "Electioneering Communications" (a.k.a. Issue Ads) In recent years, parties, section 501(c)(4) "social welfare" organizations, and 527s have frequently used soft money to fund so-called "issue ads" that promote or attack a federal candidate without using words of express advocacy that explicitly call for the candidate's election or defeat. Supporters of campaign finance reform charge that these ads circumvent FECA's hard money limitations. Shays-Meehan attempts to narrow this loophole by restricting this type of ad, which it calls "electioneering communications." The bill defines "electioneering communications" 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) is "targeted" to the relevant electorate. A communication is targeted if it can be received by 50,000 or more individuals in the congressional district or state in which a candidate is running for Congress or the Senate. Thus, even a nationally run television ad in which a Congressional leader supported a policy position would be considered targeted if at least 50,000 people in the representative's district could view the communication. If the ad refers to a candidate for the offices of Vice President or President, the targeting provision does not apply. Shays-Meehan prohibits business corporations, nonprofit corporations, and labor unions from making these electioneering communications other than through their federal PACs, just as they are forbidden from making direct contributions to candidates or communications involving express advocacy. Individuals and unincorporated associations may legally make unlimited electioneering communications, but may not finance those communications using funds that include corporate or union contributions. Any person or organization whose electioneering communications total $10,000 or more must report on their contributors who gave in excess of $1,000. Opponents of the bill are challenging the constitutionality of the prohibition on corporate electioneering communications, but the law includes several provisions that are designed to prevent the entire issue ad portion of the bill from being overturned in the event of a successful constitutional challenge. In the event the definition of "electioneering communication" is found unconstitutional, the bill contains a fallback definition establishing an electioneering communication as any communication that promotes, supports, attacks, or opposes a candidate and is suggestive of "no plausible meaning other than an exhortation to vote for or against a specific candidate." However, the FEC express advocacy regulation upon which the fallback definition is based has already been held to be unconstitutional by the 1st and 4th circuit federal appellate courts [See NN 11/01]. An expedited review of the bill by the Supreme Court should settle the question of whether or not these restrictions on ads are constitutional. The Court may also provide guidance on whether the "no plausible meaning" standard is too vague to survive a constitutional challenge. This will help any organization that makes independent expenditures or runs issue ads. Coordination Redefined (Again) Shays-Meehan provides that electioneering communications that are "coordinated" with a candidate, her agent or campaign, or a political party will be treated as an in-kind contribution. This is consistent with past FEC practice, which treats any coordinated expenditure for a communication featuring a candidate as an in-kind contribution. However, the bill discards the FEC's recently adopted coordination regulations and directs the FEC to come up with tougher standards that do not require a demonstration of "agreement or formal collaboration" between the candidate and the person making the communication. The result is that nonprofits and advocacy groups that run ads featuring candidates will have to be even more vigilant regarding their contacts with candidates and parties to avoid having their public communications transformed into prohibited corporate contributions. Impacts on the Political Landscape The Shays-Meehan bill will alter the political landscape drastically if it goes into effect as anticipated the day after this year's midterm elections. While it is difficult to predict the net result of the changes the bill has wrought, there are some clear "winners" and "losers." The most obvious losers are the national political parties, which may find their coffers and influence diminished. Stripped of their ability to collect soft money, the national political parties will be forced to rely on hard money contributions. As a result, the balance of power is likely to shift from corporations and wealthy donors to skillful individuals who can collect large numbers of individual $2,000 hard money contributions and turn them over in bulk to candidates. This perfectly legal "bundling" of contributions is unaffected by Shays-Meehan, even though bundling was one of the main ways in which Enron officials raised money for candidates during the 2000 election cycle. In contrast, state and local parties are winners since they will still be able to collect soft money from donors in $10,000 increments for use (indirectly) in federal races. Shays-Meehan is not good news for advocacy organizations accustomed to running issue ads during elections. Those organizations that want to broadcast political communications within the 30/60 day "blackout" period will have limited options under the law as written:
By Mark Sawchuk   Important Definitions in Current Federal Election Law In preparation for this fall's midterm elections, we are providing you with this glossary of common election law terms. The glossary will help you as you read this month's issue of the Nonprofit Navigator. For your convenience, we will provide links back to this glossary in future election law articles. Some of these definitions may change after this year's elections as a result of the Shays-Meehan campaign finance reform bill, but we will be informing you of those changes. Contribution A contribution is anything of value given to a candidate, party committee, or PAC for the purpose of influencing a federal election. Contributions include not only gifts of money, but in-kind donations of any goods or services without charge or at a discount (such as mailing lists, polling data, office space, etc.) Expenditure An expenditure is any payment, purchase, gift, or other thing of value, including an in-kind contribution, made for the purpose of influencing a federal election. Express advocacy Express advocacy is a communication that explicitly urges the election or defeat of a clearly identified federal candidate. An expenditure for an express advocacy communication is usually considered an in-kind contribution to the candidate on whose behalf it is made, unless it is shown to be an independent expenditure. Federal election regulations consider express advocacy any communication that uses phrases (also known as "magic words") such as "vote for," "re-elect," "support," "defeat," or "Smith for Congress." A controversial additional regulation [see NN 11/01] says that express advocacy includes a communication that a reasonable person could only interpret as advocating the election or defeat of a clearly identified federal candidate. Independent expenditure An independent expenditure is an expenditure for an express advocacy communication that is not coordinated with a candidate or political party. Coordinated expenditure Formally known as a "General Public Political Communication," a coordinated expenditure is any communication that refers to a clearly identified candidate—whether or not it contains express advocacy—that is made at the request or suggestion of a candidate or party; or where a candidate or party has exercised control in the decision-making authority over the content, timing, location, mode, intended audience, volume of distribution, or frequency of placement of the communication; or where a candidate or party has had substantial discussion or negotiation with the person making the communication about its content, timing, location, mode, intended audience, volume of distribution, or frequency of placement, resulting in collaboration or agreement. A coordinated expenditure is usually considered an in-kind contribution to the candidate on whose behalf it is made. Issue advocacy This is a term that is not explicitly defined in federal election laws or regulations, but it has come to refer to almost all political communications that stop short of express advocacy. An issue advocacy communication often contains a reference to a clearly identified candidate and portrays him/her in either a positive or a pejorative light, but does not actually urge the election or defeat of the candidate. If such a communication is coordinated with a candidate or political party, it will usually be treated as an in-kind contribution. Issue ads sometimes also discuss an issue without referring to a clearly identified candidate (these are typically known as "pure issue ads"). Hard money Hard money refers to all contributions and expenditures that are limited or regulated by the Federal Election Campaign Act. "Soft" money "Soft" money is all money that is not limited or regulated by the Federal Election Campaign Act. In recent years, soft money has most often been used to finance issue advocacy. Current laws allow individuals, corporations, and unions to give unlimited amounts to parties and PACs; but after the 2002 elections, national political parties will not be able to receive soft money as a result of the Shays-Meehan bill. Qualified nonprofit corporation All unions and corporations, whether for-profit or nonprofit, are barred from making contributions and expenditures in connection with a federal election. The only exception to this rule is for qualified nonprofit corporations, which may make independent expenditures if they meet certain requirements. Qualified nonprofit corporations i) are 501(c)(4) social welfare organizations; ii) are formed for the express purpose of promoting political ideas; iii) do not engage in any business activities; iv) have no shareholders or individuals who have a claim on their assets or earnings; and v) are not established by and receive no funds, either directly or indirectly, from any business corporation or labor union. Qualified nonprofit corporations are commonly referred to as "MCFL organizations" after the Supreme Court Case (Massachusetts Citizens for Life v. FEC) that established the exception. By Mark Sawchuk Fourth Circuit Decision Allows Some 501(c)(4)s to Make Direct Contributions to Candidates A surprising decision by the Court of Appeals for the Fourth Circuit has punched a hole in the longstanding Federal Election Campaign Act (FECA) ban on corporate contributions to federal candidates. The court's decision in Beaumont v. FEC overturns the ban as applied to certain section 501(c)(4) nonprofit organizations. The plaintiffs, Christine Beaumont and North Carolina Right to Life, Inc. (NRCL) argued that the FEC-enforced ban on corporate contributions violated their First Amendment right to free speech. Contribution and Expenditure Restrictions FECA prohibits all corporations, whether for-profit or nonprofit, from making contributions to or political expenditures on behalf of federal candidates. For the past twenty-five years, the Federal Election Commission (FEC) has vigorously defended these restrictions as necessary to prevent the appearance of corruption in the political system. Despite this, several court decisions have successfully chipped away at the constitutionality of FECA's prohibition on expenditures by certain nonprofit corporations, with the 1986 Massachusetts Citizens for Life (MCFL) decision being the most significant of these cases. Beaumont v. FEC is exceptional because it is the first time a Federal court of appeals has rejected the constitutionality of FECA's ban on nonprofit corporate contributions. The Importance of Massachusetts Citizens for Life The Beaumont court based its decision largely upon the Supreme Court's reasoning in the MCFL case, despite the fact that this case only tackled the regulations on expenditures. In the MCFL decision, the Supreme Court held that certain nonprofit ideological corporations could not constitutionally be prohibited from making independent expenditures because these corporations possess qualities that make them unlikely to cause political corruption. These 501(c)(4) "MCFL corporations" 1) promote political ideas and do not engage in business activities; 2) do not have shareholders or other persons with a claim on their assets or earnings; and 3) are not established by for-profit corporations or labor unions, and refuse contributions from those entities. The Beaumont court broadened the scope of MCFL by extending its reasoning to contributions as well as expenditures. The court ruled that NCRL qualifies as an MCFL corporation and therefore does not pose the same threat of potential corruption as for-profits. It held that MCFL-type nonprofits should not be banned from making direct contributions "simply because they have taken on the corporate form." The court explained that nonprofit corporations like NCRL more closely resemble an individual or an unincorporated advocacy group than a for-profit corporation, and like those entities, should be subject to contribution limits instead of a total ban. For these reasons, the court concluded that the ban on corporate contributions was unconstitutional as applied to NCRL and other MCFL corporations. Less groundbreaking, but equally important, was the court's declaration that the FEC regulations codifying the characteristics of MCFL corporations were unconstitutional as applied to NCRL. The FEC had argued that NCRL did not qualify as an MCFL corporation because it had accepted small amounts of corporate contributions. The Court of Appeals concluded that this "modest percentage of revenue" did not disqualify NCRL from meeting the MCFL exception and that the expenditure regulations based on the MCFL case were too narrowly drafted. Now What? Beaumont strikes at the very heart of the federal election laws. It also reaffirms the difficulty of preventing political corruption without violating the First Amendment's guarantees of freedom of speech and political association. The outcome of Beaumont could substantially loosen the requirements for qualified nonprofit status, and enable these (c)(4)s to make direct contributions to candidates rather than dealing with the burden of setting up a federal PAC. By extension, the ruling permits MCFL corporations to make hitherto forbidden expenditures that are coordinated with candidates. The FEC may choose to appeal the case, which—like MCFL before it—could eventually reach the Supreme Court. By Mark Sawchuk Don't Neglect Your PAC Filing Requirements The registration and reporting requirements for federal, state and local section 527 organizations are extensive and complicated, thanks in large part to the Full and Fair Political Activity Disclosure Act of 2000. All PACs and other 527s should be mindful of upcoming filing and reporting requirements. IRS Registration and Reporting Applies to State PACs The Full and Fair Political Activity Disclosure Act was primarily enacted in order to allow greater scrutiny of soft money 527s (often called "soft money PACs") in federal elections. Such organizations conduct activities that are considered "political" for tax purposes but are not regulated by federal election laws (and therefore do not report to the FEC). The legislation's broad reach, however, means that many state and local PACs also need to fulfill additional registration and reporting requirements. The Act requires all 527 organizations created after July 1, 2000 to register with the IRS on Form 8871 within 24 hours of their formation (those organizations formed prior to July 1, 2000 should have registered by July 31, 2000). The only organizations exempt from this registration requirement are 1) those that are required to report to the FEC; or 2) those that reasonably anticipate that their annual gross receipts will always be less than $25,000. Many state and local PACs will not meet either of these exceptions. Moreover, a federal PAC with a non-federal account must still register the non-federal account with the IRS even though the federal account is required to report to the FEC. In addition to filing Form 8871, the law requires many registered organizations to file periodic reports (Form 8872) with the IRS disclosing their contributors and expenditures. Only state or local committees of a political party and political committees of state or local candidates are exempt from filing these reports. A staffer at the IRS has reported that many state and local PACs and campaign committees have not registered because they are not aware of the law. If a 527 organization fails to register, the IRS is statutorily required to tax income that is normally not taxable, such as contributions and membership dues, at a 35% rate. While the IRS is currently deciding whether it has the authority to refrain from penalizing delinquent organizations that have reasonable cause to file late, the IRS official recommends that any 527 that has not registered on time should do so as soon as possible. Other Filing Requirements The Act has also created or broadened laws that apply to all 527 organizations, regardless of whether or not they report to the FEC. Every 527 organization with annual gross receipts of $25,000 or more, and those with more than $100 of taxable income, must file Form 1120-POL with the IRS by the 15th day of the third month after the close of the fiscal year. Since many 527s use the calendar year as their fiscal year, the first time many such organizations will be required to file the 1120-POL is March 15. 527s whose annual gross receipts exceed the $25,000 threshold must also file IRS Form 990, the exempt organization annual information return, by the 15th day of the fifth month after the close of the organization's fiscal year. For calendar-year taxpayers, the 990 will be due May 15. If the organization's gross receipts during the year are less than $100,000 and its total assets are less than $250,000 at the end of the year, it may substitute Form 990-EZ for the full Form 990. Both the 1120-POL and 990 will be made available for public inspection by the IRS, and the organizations themselves must also make them publicly available. Is Relief on the Way? Legislation currently before the House of Representatives includes a provision that would exempt state and local PACs from duplicative federal filing requirements if they are already subject to "substantially similar" reporting requirements to state or local agencies. The legislation could be taken up as early as April 7. By Mark Sawchuk 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 |