Under federal election law, a public communication that is coordinated with a candidate is generally considered an in-kind contribution to that candidate. Because corporations are prohibited from making campaign contributions, they are not allowed to coordinate their electoral communications with candidates or political parties. Over the years, this prohibition has generated substantial debate over what it means to "coordinate." Less than two years ago, the FEC issued regulations that created a narrow definition of coordination [see NN, 01/01], which sponsors of the Bipartisan Campaign Reform Act (BCRA) have argued make it almost impossible to prove coordination with a candidate. In response, BCRA directed the FEC to develop new regulations which, if adopted, could significantly expand those cases where a communication may be found to be coordinated.

The rulemaking proposes a three-part test to establish when a communication has been coordinated. The first element of the test focuses on who pays for a communication. Unsurprisingly, to be coordinated with a candidate, a communication would need to be paid for by someone other than the candidate.

The test's second element would limit the scope of the regulations to communications whose content is reasonably related to a federal election. Such content includes material prepared by a candidate, expressly advocating the election or defeat of a specific candidate, or satisfying the definition of an electioneering communication (the subject of another FEC rulemaking: see NN, 07-08/02). In addition, the FEC has proposed several alternative content standards, including ones that would consider the timing of a communication, its intended audience and what is said about a candidate.

The third element of the test would address conduct, such as interactions between a candidate and the maker of a communication. Significantly none of the proposed conduct standards would require agreement or formal collaboration between the parties. One proposed standard would be satisfied, however, if the person making the communication uses a commercial vendor that has provided services, such as polling and fundraising, to a candidate in the current election cycle. Another proposed standard would prevent people who have worked for a candidate, either as an employee or an independent contractor, from paying for or participating in the creation of a communication featuring the candidate.

In addition to redefining coordination, the proposed rulemaking seeks to expand the immediate reporting requirement for independent expenditures. Under the new rules, an expenditure which was made or contracted for up to and including the 20th day before the election and that total more than $10,000 would have to be reported within 48 hours after the expenditure was made or the contract entered, whichever is earlier. Additional expenditures of more than $10,000 would necessitate additional 48-hour reports.

The proposed regulations would also relax the rules about creating voter guides for a federal election. Currently, organizations creating voter guides can only contact candidates in writing to gain information about the candidate's views on issues; other types of communication risk being prohibited coordination. Under proposed regulations people, including corporations and labor unions, can draft voter guides after informally communicating with a candidate about his or her position on issues.

Comments and responses to the proposed rules were due to the FEC by October 11th and final regulations are scheduled to be released no later than December 22, 2002.

By Amy Licht






Political Organizations Stay Alert: An Alabama Court Declares IRS Rules on Disclosure for "Stealth PACs" Unconstitutional

A federal court has ruled that some of the reporting and disclosure requirements for Section 527 organizations are unconstitutional. The impact of the ruling, however, is unclear.

In late August, a Federal District Court in Alabama ruled in National Federation of Republican Assemblies v. United States, that some portions of a law passed two years ago to regulate political organizations (sometimes called "stealth PACs") are unconstitutional. Since July 2000, 527s, including all state PACs, have been required to register with the IRS and to disclose contributions over $200 and expenditures over $500.

The Alabama decision found that the requirement to disclose expenditures is unconstitutional. The court also found that the requirement for disclosure of expenditures or contributions made in connection with state or local elections is unconstitutional. However, the court held that the requirement under Section 527(j) for the disclosure of contributions to influence federal electoral activity is still constitutional. The court did not explain more specifically how to determine what sort of election a contribution is made "in connection with," so the application of the ruling to 527s active in both local and federal elections is uncertain.

For the time being, the Department of Justice has requested that the District Court clarify the judgment. The District Court issued an injunction that stops the IRS from enforcing the allegedly unconstitutional areas of the law – but only for the actual parties in the case. Until further notice, all 527s should comply with the existing IRS disclosure and registration requirements.

527s on the IRS Watch

Interestingly enough, the decision coincides with stepped-up auditing by the IRS of 527 political organizations. Beginning in 2003, the IRS will systematically begin increasing its enforcement of the disclosure laws for 527s. The Alabama decision may affect decisions about action taken against non-compliant 527s. For now, however, the IRS is moving forward to follow-up on 7,000 "potential non-compliant 527 organizations," whose grace period for filing ended on July 15, 2002.

Reporting requirements for 527 political organizations may be found on the IRS website, by following this link: http://www.irs.gov/charities/political/article/0,,id=96355,00.html.

By Miguel de Baca





Don't Sell the Farm: Nonprofit Wins Property Tax Exemption in DC

A recent decision by the District of Columbia Superior Court signals a victory for charitable organizations that own buildings in the nation's capital. In Cato Institute v. District of Columbia, the DC Superior Court found that a charitable organization located in DC that engaged in federal-level public policy work qualifies for real property tax exemption. The court's reasoning may be of particular interest to organizations that focus on national policy issues but conduct other activities outside the District of Columbia.

The Cato Institute, which owns its headquarters at 1000 Massachusetts Ave., NW, and is exempt from federal taxation under section 501(c)(3) of the Internal Revenue Code, applied for and was denied real property tax exemption by the DC government. The organization appealed the denial to the Superior Court. The dispute focused on two issues: whether Cato, a "think tank" organization that focuses on federal policy issues, qualifies as charitable, and, if so, whether its charitable activities are "principally within" the District.

The District argued that Cato does not qualify as a charitable organization because it engages in lobbying. The court found that the bulk of the organization's activities over the course of its 25-year existence, including publishing books, studies and other materials, as well as hosting numerous forums and seminars on a range of topics, easily qualified as charitable. The court dismissed the District's contention that any amount of lobbying undermines an organization's eligibility for real property tax exemption. Instead, the court essentially adopted the federal tax rule for lobbying by 501(c)(3) organizations, distinguishing "substantial and continuous" lobbying, which precludes tax exemption, from "incidental" or "ancillary" attempts to influence legislation, which are consistent with an organization's charitable function.

The court also examined Cato's tax exemption in relation to the geographical locus of its activities. DC law states that in order to qualify for real property tax exemption, an organization's building must be "used for purposes of public charity principally within the District of Columbia." The government argued that Cato was ineligible for tax exemption because its activities did not specifically "benefit" District residents. The court explained that Cato satisfied the geographic locus requirement because its activities are primarily concerned with policies of the federal government, which is largely located in the District, and that the majority of its meetings and other activities take place at its office in DC. The decision is significant because the court indicated that even if an organization's activities do not actually occur primarily within the physical boundaries of the District, it may still qualify for real property tax exemption if the substance of its work targets individuals and institutions that are located in DC.

Interestingly, the Cato decision makes no mention of a 1997 U.S. Supreme Court decision in which the Court held unconstitutional a Maine statute that gave preferential real property tax treatment to charities that were operated principally for the benefit of Maine residents. In any case, Cato gives further indication that DC may be unable to narrowly enforce the geographic impact requirement in the real property tax exemption statute. Whether DC will resist granting real property tax exemptions to other charities owning offices in the District remains to be seen.

By Amy Licht





The Accidental Employment Contract

Most employers like to believe that they are fair and just. They would never fire an employee without a good reason, and certainly they would give a struggling subordinate another chance to get her act together. When faced with budget shortfalls, they would do their best to follow predetermined procedures in designing a careful reduction in force with elaborate protections for seniority.

Employers are often tempted to express those sentiments in their employee handbooks, with sections devoted to possible reasons for termination, progressive disciplinary policies and layoff procedures. In practice, however, there often arise situations in which a less cumbersome discharge process is necessary, and a promise of three strikes or 60 days' notice is inconvenient.

Recognizing the tension between ideals and reality, savvy employers have often resorted to announcing policies which set out "guidelines" for termination and disciplinary procedures, at the same time quietly disclaiming the contractual effect of the language. But for the past decade, the courts have been catching on to this ruse. Continuing this trend, in this summer's Dantley v. Howard University, the District of Columbia Court of Appeals ruled that Howard's layoff policies in its employment handbook could be considered binding contractual promises. The university's argument, that the handbook clearly stated that "this document is not to be construed as a contract," was to no avail because that disclaimer was rationally at odds with the detailed instructions on the proper approval of a reduction-in-force (RIF) plan. Worse given the inconsistency, the university failed to expressly provide in its handbook that employment at Howard was at will. Because contract law generally resolves ambiguous terms against the drafter of a contract, a jury could reasonably decide that Howard intended to be bound by its statements regarding RIF procedures.

Dantley serves as a reminder that employers should periodically review their employment handbooks and personnel manuals to ensure that they are used as the employer intends. If an employer does not intend to adopt a de facto employment contract with its employees, limiting its rights to terminate employees at will, it should do the following: