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May 2005
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Payroll Deduction Plan Violates 501(c)(3) Ban on Political Activities VBIA Amendments Protect Armed Service Members' Employment Rights State Charitable Solicitation Registration Resource on Web IRS Workshops on Maintaining 501(c)(3) Status FEC Proposes Rules for Internet Payroll Deduction Plan Violates 501(c)(3) Ban on Political Activities In a recent Technical Advice Memorandum (TAM), the IRS ruled that a public charity that administered and promoted a payroll deduction plan through which employees could donate to a PAC violated the Internal Revenue Code's prohibition on political activities by 501(c)(3) organizations. The charity, which is the parent company of a collection of healthcare providers, organized and administered the voluntary program to benefit the PAC of a hospital industry trade association. The charity's president, who had been elected chairman of the association, announced his intention to increase participation in the PAC by informing employees of the charity and its subsidiaries of their right to give to the PAC through payroll deduction. In order to make employees aware of the plan, the president taped a video encouraging them to contribute. The video was then shown at regularly scheduled staff meetings. Additionally, the PAC was promoted in the organization's newsletter. Organizations exempt under Section 501(c)(3) of the Code are prohibited from participating or intervening in any political campaign for or against a candidate for public office. Direct as well as indirect intervention in a political campaign is considered a violation of this prohibition. This means that charities may not support political organizations, such as PACs, in any way. The charity argued that because the PAC had paid the incremental costs of administering and promoting the payroll deduction plan, such as the production and duplication costs of the video, no violation had occurred. The IRS, however, identified other costs to the organization that were not repaid, such as the cost associated with the President's time spent making the video. Furthermore, because the charity's president appeared on the video and presumably urged support for the PAC through the payroll deduction plan, the video amounted to an endorsement of the PAC by the charity. Supporting and endorsing a PAC violates the prohibition on political campaign activities, and the IRS ruled that the charity would need to pay a 10% excise tax on the expenditures involved in promoting and administering the payroll deduction plan. Rulings from the IRS on what constitutes prohibited political activities are somewhat rare, making this memorandum instructive. The TAM shows that the IRS will generally consider statements made by a top employee on company time to be attributable to the organization. It also demonstrates how reimbursement of incidental expenses incurred by a charity for political activities may not be sufficient to avoid a violation. Allowing a PAC to use a charity's facilities, even if it does not cost the charity anything, can violate the law. By Damon King  VBIA Amendments Protect Armed Service Members' Employment Rights The recently enacted Veterans Benefits Improvement Act (VBIA) makes two notable amendments to the Uniformed Services Employment and Reemployment Rights Act (USERRA), which protects members of the armed services who must leave employment in order to perform military service. First, VBIA extends the maximum amount of time that USERRA-covered employees are eligible for employer-sponsored health care during a period of absence from eighteen to twenty-four months. Under USERRA, employees who are absent from work due to military service are entitled to continue receiving employer-sponsored health care, regardless of whether the employer is too small to be bound by COBRA. (COBRA only applies to employers with more than 20 employees.) As of December 10, 2004, employees reporting for duty in the armed services may receive employer-sponsored health care for up to twenty-four months. Second, the law mandates that employers provide notice to their employees of the rights and benefits to which they are entitled under USERRA. Employers can fulfill this requirement by posting a Department of Labor developed notice in a prominent place where employees would typically check for such information. This notice should be posted immediately, if employers have not already done so. The poster can be downloaded from the Department of Labor Web site: www.dol.gov/vets/programs/userra/poster.pdf. By Lizzie Hubbard State Charitable Solicitation Registration Resource on Web A useful resource for preliminary information on state charitable solicitation registrations and the Uniform Registration Statement is www.multistatefiling.org. The site, a project of the Multi-State Filer Project, includes a summary of filing procedures for 38 states and the District of Columbia, as well as a compilation of the reporting requirements for registered organizations. It also contains useful information about the Uniform Registration Statement (URS), a requirement in most states for organizations seeking to register to solicit charitable contributions. If you plan to solicit contributions in a particular state, it is important that you check with the appropriate state agencies for registration information and consult legal counsel. While this resource does not replace direct consultation with enforcement agencies or counsel, it provides a useful starting point for organizations that anticipate carrying out fundraising programs in multiple jurisdictions. By Damon King IRS Workshops on Maintaining 501(c)(3) Status Throughout spring and summer, the Internal Revenue Service Exempt Organizations Division will be hosting 1-day workshops across the country for the staff and volunteers of small and mid-sized 501(c)(3) tax-exempt organizations. These introductory workshops, led by experienced IRS experts, will cover a wide range of topics related to maintaining 501(c)(3) tax exempt status, including unrelated business income, employment tax issues, reporting and disclosure, and types of activities that may jeopardize an organization's 501(c)(3) tax exemption. Upcoming workshops will be held in Cleveland, Washington, and Charlotte. Enrollment is limited to 150 participants per day and there is a $30 non-refundable registration fee. Pre-registration is required. For more information about the workshops go to the "Charities & Non-Profits" section of the IRS website or click here. By Damon King FEC Proposes Rules for Internet The Federal Election Commission is considering regulations governing Internet activity, which may be of interest to our readers. This summary of a few highlights of the proposed rules may help you determine whether your organization should take a closer look at the FEC proposal and possibly submit formal comments. Earlier FEC regulations implementing the Bipartisan Campaign Reform Act of 2002 ("BCRA", aka McCain-Feingold) included a broad exception for all Internet activity. This exception, along with many other regulatory provisions, was challenged by BCRA's sponsors, and the court determined that the expansive exemption for the Internet was not permissible. Hence, the FEC has been forced to revisit the extent to which campaign finance laws apply to online communications. 1. Internet Communications as "Public Communications" The previous regulations expressly provided that Internet communications would not be included in the definition of "public communications." The result of this exclusion was that on-line messages, whether via web, e-mail, or other Internet mechanism, were excluded from the regulations governing coordination with a candidate or party. Organizations could freely engage in on-line advocacy without worrying about whether their other connections with a campaign could give rise to a complaint and investigation under the coordination rules. The new proposal retains the general exemption, which is probably good news for nonprofits. The regulations would define a category of Internet communications which will be considered "public communications": those which are placed for a fee on another person's or entity's web site. The proposal invites comments on this definition, and it is entirely possible that it will be broadened or narrowed in the final rules. 2. Disclaimers Many types of communications are required to contain specified disclaimer language (for instance, the familiar "paid for by" disclosure). Confusingly, the term "public communications" is also used in this context, but with a slightly different definition. The current regulations apply the disclaimer requirements to PAC web sites and unsolicited emails sent to more than 500 people. The FEC now proposes changing this requirement to apply only to e-mails where the addresses of the recipients were acquired through a commercial transaction. This would alleviate some administrative headaches for organizations that send political e-mail messages to lists of supporters and activists. However, the proposal leaves some questions unanswered, such as whether an address purchased for purposes of making one communication will ever subsequently be treated as "owned" by the purchaser. The Commission also seems to be considering alternatives to this approach, which may be more or less beneficial to the nonprofit advocacy community. Another can of worms that will possibly be opened up in connection with the disclaimer requirements pertains to bloggers who post political commentary. The Commission asks an array of questions, including whether bloggers may be required to disclose payments from candidates. The proposal does not attempt to define a "blogger." 3. Volunteer Activity FEC rulings in the 1990s suggested that even volunteer Internet-related activity by individuals might be treated as a regulated "contribution" or "expenditure" if the underlying costs (some portion of Internet access, web hosting, hardware and software costs) exceeded a threshold amount. The Commission now proposes making it clear that an individual using personal computer equipment for voluntary election-related communications may do so freely without incurring reporting obligations. The exception applies to use of equipment provided by another person, such as a friend or use of a public library's Internet access. The proposed exception does not apply to use of equipment provided by a corporation or labor union, such as when employees are permitted to take laptops home for personal use. Such use may still be permitted, but only if it is covered by other regulations allowing individuals to make "occasional, isolated, or incidental" use of corporate facilities for political purposes. 4. Media Exemption By law, the news media are exempted from most of the rules that otherwise limit corporate political activity. They may provide coverage of candidate events and even make endorsements without worrying about making a prohibited "expenditure" or "contribution." A handful of rulings have applied this exception to media activities on the Internet on a case by case basis. The Commission now proposes revising its regulations to explicitly state that the media exemption applies to "a news story, commentary, or editorial" that appears over the Internet. Although nonprofits that operate online news services will still have to comply with the tax code prohibition or limitation on political activity, if covered by this rule they would be relieved of concern about FEC regulation. The proposal specifically asks whether the exemption should be limited to online activities of only those entities with off-line media operations. In other words, the FEC is considering not extending the exemption to news media that only exist on the Internet and not in more traditional forms. The FEC proposal further inquires whether the exemption should be understood to apply only to "traditional business models," an approach which would likely exclude many nonprofits. Finally, the Commission is considering whether bloggers should qualify for the media exemption. By Beth Kingsley 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 | |