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executive orderAt the National Prayer Breakfast earlier this year, President Trump vowed: “I will get rid of and totally destroy the Johnson Amendment.” The Johnson Amendment, named after former President Lyndon Johnson, refers to language in the Internal Revenue Code Section 501(c)(3) that prohibits charities, including religious organizations, from participating in campaigns on behalf of or in opposition to a candidate for public office.

The president took official action on May 4 through an Executive Order, titled “Promoting Free Speech and Religious Liberty,” that exhorts federal agencies to respect and protect “religious and political speech.” However, notwithstanding the controversy surrounding the announcement, including one organization’s threat to file a lawsuit the same day, the Order will have little practical effect, and the threat of a lawsuit was withdrawn.

Continue Reading Trump Asks IRS to Keep Hands Off Religious Nonprofits: Will It Have Any Effect?

The question of when a politically-active, nonprofit 501(c)(4) group must publicly disclose its donors has been on the front burner in various states—most, like New York and California, have called for greater regulation, while others like Arizona have loosened the reins. At the federal level, silence has been the norm because the statute is generally read as only requiring disclosure by a 501(c)(4) (or other nonprofit such as a 501(c)(6)) if a donor contributes for the purposes of funding a particular ad. The FEC has consistently deadlocked on complaints alleging either that a donor gave for the purpose of supporting an ad or that a 501(c)(4) should be treated as a political committee and disclose all of its donors.

Last week, however, details were released from an FEC enforcement matter that met this stringent test and, as a result, the Commission levied fines totaling $233,000 against three nonprofit groups for failing to identify donors behind specific advertisements. These three settlement agreements, released as a group, provide significant guidance to nonprofit 501(c)(4)s and other actors as to what type of conduct will trigger donor disclosure at the federal level.

Continue Reading The FEC Levels Fines on Nonprofits over Donor Disclosure

tax forms and notesA substantial number of organizations exempt under Internal Revenue Code (Code) § 501(c)(4), and their individual officers and directors, may be subject to financial penalties if they do not file a Form 8976, Notice of Intent to Operate Under Section 501(c)(4), with the Internal Revenue Service (Service or IRS) on or before September 6, 2016.

On July 8, 2016 the IRS released a revenue procedure for implementing new statutory requirements for certain organizations that operate under section 501(c)(4) of the Internal Revenue Code. This requirement comes on the heels of the December 2015 enactment of the Protecting Americans from Tax Hikes (PATH) Act of 2015.

The recently released Revenue Procedure 2016-41 contains temporary regulations implementing the 501(c)(4) provisions of the PATH Act and describes the new Form 8976 and the related rules for filing it.

Continue Reading New Mandatory IRS Notification Process for 501(c)(4) Nonprofit Organizations Finally Announced

By U.S. Government [Public domain], via Wikimedia Commons
For the rest of the 2016 election season, nonprofits in Arizona can be politically active without registering as a political committee. As long as they meet basic qualifications, nonprofits can run candidate ads, support ballot measures, and even make contributions, all without the burdens of registration, ongoing reports, and disclosure of donors.

Arizona concluded its 2016 legislative session in May with the passage of an important campaign finance law, House Bill 2296. This bill mirrors one passed earlier in the session, Senate Bill 1516. Both bills exempt certain nonprofit organizations from Arizona’s definition of a political committee, but SB 1516 would have only taken effect starting in 2017. HB 2296, on the other hand, makes these rules effective in time for the 2016 election. As of June 1, 2016, nonprofits active in Arizona elections will not have to register as a political committee and will be free from the regulatory obligations that come with being a political committee.

Continue Reading 2016 Election: New Rules for Nonprofits in Arizona

MeeTtheCandidatesAlthough it appears that rules governing the political activities of 501(c)(4) organizations will be some time in coming, the IRS recently provided some new insights into how 501(c)(3) organizations can – and cannot – interact with the political world.  In an adverse determination publicly released earlier this month, the IRS looked closely at how a 501(c)(3) organization can engage in educational activities, like conventions and conferences, that involve candidates who may identify with a particular political party.

In general, organizations recognized as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code cannot engage in what is called “political campaign intervention.”  This requirement is absolute:  as a condition of getting (c)(3) status, organizations essentially cannot be too politically partisan in nature.  For tax purposes, political campaign intervention includes any communications or activities that support or oppose one or more candidates for public office.  This includes the more clear-cut activities, like running an ad opposing a candidate or making endorsements in a particular race.  But it also can include other activities where the organization uses its resources to give one candidate an advantage over another.

In this determination, the IRS addressed one of these less obvious situations.  Here, the organization applying for recognition as a 501(c)(3) told the IRS it planned to hold symposiums of “thinkers, statesmen and opinion leaders” as its primary activity.  The organization anticipated that elected politicians, as well as candidates in the 2012 presidential race about to compete in a key primary, would be in attendance and would be speakers.  An agenda for the symposium submitted by the organization to the IRS showed that all political speakers invited were affiliated with one particular party; it also included a “Meet the Candidates” event, for attendees paying an additional fee.

In planning its symposium, the organization also internally discussed using contacts within the political party to get speakers and to increase attendance, targeting county party groups for attendees, coordinating with local college and high school groups associated with the party for events, and keeping the state party chair up to date and involved in decisions.  Continue Reading Too Close for Comfort? The IRS Gives New Guidance on 501(c)(3)s and Working with Candidates

downbutnotoutThe IRS recently denied tax-exempt status to two organizations based on their political activities. The two groups – whose names have been redacted from letters released by the agency – sought tax-exempt status under Section 501(c)(4), which is reserved for “social welfare” groups whose primary purpose is to benefit the general community.

Controversy has been swirling around campaign spending by 501(c)(4) groups. Unlike PACs and other organizations formed primarily to influence elections, a 501(c)(4) is permitted to keep its donors confidential, leading some critics to term their election-related spending “dark money.” Last year, a furor over IRS targeting of Tea Party groups mired the agency in Congressional hearings and resignations from senior officials, and appeared to paralyze the processing of applications from groups seeking 501(c)(4) status. 

In the last couple of months, however, the IRS has reasserted its authority. The IRS and the Treasury Department proposed new rules in late November, which seek to clarify when activities conducted by 501(c)(4) groups will be considered election-related. The proposed rules take such an expansive view of election-related spending that our earlier blog post characterized the agencies’ proposal as an “unsafe harbor.” The agency’s latest action to reject two applications for 501(c)(4) tax-exempt status based on purported political activities may be further evidence of revived interest in this area.

In one case, the requesting group presented sketchy plans to focus public debate and officeholders on an issue of interest to the organization. (The issue is unidentified in the released IRS materials.) According to the IRS, the group acknowledged spending about 60% of its first year’s budget on an election-year flier advocating the defeat of a candidate. The IRS also noted that the group’s website was devoted to raising money for political ads to help elect members of Congress who share the organization’s views. The bulk of the group’s spending in its second year was to compensate one of its directors, whose primary work appeared to relate to the lone flier and the group’s website. None of these activities, the IRS concluded, promote the public good and social welfare.

In the other case, the group seeking exemption under 501(c)(4) was formed to serve as a liaison between the community and one of the state political parties. (The state and party is unidentified.) The agency noted that even if an organization substantially benefits the community, it will not qualify for exemption if it also primarily benefits private interests. In this case, the group’s mission, as described in its bylaws, was to promote participation in the state party and support candidates – activities which the IRS concluded would benefit the private interest of the State party, and thus disqualify the group from 501(c)(4) status. 

It is premature to say whether these recent IRS actions portend more vigorous review of 501(c)(4) applications or merely a small step by an agency under siege to rehabilitate itself. After all, these are relatively easy targets. Neither group appears to be represented by outside counsel. The first group had very little funding and seems to have produced nothing more than a website and a single flyer. The application by the second group is not unlike one submitted in the late eighties by a school formed to train and place campaign professionals in Republican campaigns. Indeed, the IRS’s response to the second group cites a long string of rulings from the sixties and early seventies, which is perhaps intended to tamp down concerns that the agency may be looking to establish new precedent.

In any event, a staggered giant appears to have found its footing.  What the IRS does next about political activity by 501(c)(4) groups remains to be seen.

Please join us for a webinar on January 16, 2014, at 1:00pm EST, which will provide a tune-up on government affairs compliance and examine recent trends. We will cover all the major topics you need to be thinking about as you ramp up for lobbying the new Congress and state legislatures and prepare for the mid-term elections:

  • Forming and operating a PAC or Super PAC
  • Federal and state lobbying compliance
  • Gifts to public officials and employees
  • Pay-to-play laws and doing business with state and local governments 
  • Legislating transparency by 501(c) organizations and public companies
  • Enforcement trends 

To register, click here.

On November 26, the Department of Treasury released proposed regulations billed as “more definitive rules” for when the IRS will treat certain activities by section 501(c)(4) organization as political activity. It is hard to argue that the proposal provides some clarity, but only by classifying a wide variety of activities as candidate-related and therefore not qualifying 501(c)(4) “social welfare” activity. The proposal is thus likely to present tax-exempt status concerns for many organizations. Moreover, nothing is offered to guide 501(c)(4) managers and advisors on what types of activities that relate to candidates or officeholders would qualify as promoting the social welfare.

Background

Organizations that are exempt under section 501(c)(4) of the Internal Revenue Code are required to engage primarily in activities that promote social welfare. This requirement has often been interpreted to allow an organization to engage in political activities as long as those activities are not the primary activities of a 501(c)(4). In recent years, many 501(c)(4) organizations have engaged in a substantial amount of political advocacy, while taking care not to appear to be engaging primarily in such activity. 

The IRS scandal that broke earlier this year centered on the agency’s handling of (for the most part) 501(c)(4) tax-exemption applications that suggested the possibility of extensive political activities. Many commentators have noted that the growth in 501(c)(4) political activity has presented a difficult problem for the IRS because it has such few rules in place to enforce the “primary” standard. 

Proposed Regulations

It is amid this backdrop that Treasury released its proposed regulations (which would amend portions of Treas. Regs. § 1.501(c)(4)-1). In substance, the proposal would create an “unsafe harbor”—a category of activity, specifically focused on 501(c)(4) organizations, that is termed “candidate-related political activity.” This category of activity would be included among other types of activities that are not consistent with the promotion of social welfare and, as such, that are not permitted to be a primary activity of a 501(c)(4) organization. The definition of candidate-related activity is quite broad and goes beyond what is commonly understood to be campaign activity. Among the more types of activities that are alarmingly included among the list of candidate-related political activity:

  • Conduct of a voter registration or “get-out-the-vote” drive, even if nonpartisan;
  • Hosting an event within 30 days of a primary election or 60 days of a general election where one or more candidates appear as part of the program; and
  • The payment of money to any organization described in section 501(c) that itself engages in campaign-related activity (and the presumption here appears to be that such recipient organization does engage in campaign-related activity unless a written representation is obtained from the recipient and a written restriction on the contribution is given by the 501(c)(4)).

There are many more aspects of this proposed rule and many more categories of activities that would fit into the “campaign-related” category. Interestingly, the proposal borrows from existing federal election law concepts like electioneering communications and express advocacy. Also, it should be noted that the Treasury Department has identified a number of specific areas where it is requesting comments—including whether any rules on this topic should also apply to 501(c)(5) and 501(c)(6) organizations, whether to adopt a similar approach to define impermissible campaign intervention under section 501(c)(3), and whether the rules should address how one determines whether an activity is at such a level that it becomes a “primary” activity of the organization.

Comments will be due in late February. Judging from the initial response, there are sure to be plenty of submissions.

The California Fair Political Practices Commission (“FPPC”) issued its largest fines ever on October 24, 2013, against two groups that allegedly served as conduits for millions of dollars spent on California ballot measures in 2012. Together, the groups have been tagged with a combined $1 million fine, and the PACs that received some of the funds have been ordered to disgorge a total of $15 million (although one organization has been terminated and the other has just shy of $1 million in the bank, so it is not clear how they will disgorge $15 million).

The FPPC chair, who is now a Commissioner at the FEC, said the “case highlights the nationwide scourge of dark money nonprofit networks hiding the identities of their contributors.”

The FPPC went to court right before the 2012 election to force Americans for Responsible Leadership (“ARL”) and the Center to Protect Patients’ Rights (“CPPR”) to disclose its donors under a regulation the FPPC adopted in May 2012. This regulation requires disclosure of donors in a number of situations where the donations will be used for independent expenditures that support or oppose a candidate or a ballot measure.

As set forth in the settlement document, there were two sets of contributions at issue in the case. Both originated with a 501(c)(6) entity known as Americans for Job Security (“AJS”). AJS raised approximately $29 million from 150 donors to engage in a variety of issue advocacy efforts. As the settlement makes clear, AJS was not required to register or disclose anything with the FPPC because it raised its funds for issue ads that did not expressly advocate the support or defeat of a referendum. AJS then gave a total of just under $25 million to CPPR, which is a 501(c)(4) organization, during September and October.

First Contribution: On September 11, CPPR gave $7 million to Americas Future Fund (“AFF”). AFF then gave the California Future Fund for Free Markets (“CFF”) just over $4 million. CFF was a registered political committee in California, and disclosed receiving the contribution from AFF. AFF also disclosed making the contribution to CFF. Neither AFF nor CFF disclosed that the money had come from CPPR.

Second Contribution: In mid-October, CPPR gave ARL $18 million. On October 15, ARL gave $11 million to the Small Business Action Committee (“SBAC-PAC”), which is an independent expenditure committee that opposed Proposition 30 and supported Proposition 32 (Prop 30 passed and Prop 32 failed). Both SPAC-PAC and ARL disclosed the contribution, but did not disclose CPPR as the ultimate source of the contributions.


Chart of Money

 

The Key Regulation: The FPPC’s regulations provide that if a 501(c)(4) makes a contribution from its general treasury funds to support or oppose a ballot measure, it must disclose those donors who request or know that their payments will be used to make a contribution to support or oppose a ballot measure. A donor knows its donation will be used to make a contribution if the payment is made in response to a message or solicitation indicating the organization’s intent to make a contribution.

The Violations: The FPPC alleged that under the regulations AFF and ARL should have disclosed CPPR as the source of the funds they used to donate to CFF and SBAC-PAC, respectively. In the settlement, the FPPC makes clear that these were inadvertent or “at worst negligent” and were not knowing and willful violations. The FPPC also determined that neither AFF nor ARL needed to register themselves as political committees.

Not Subject to Disclosure: The FPPC explained in the press release that some of the transactions involved did not have to be disclosed.

  • First, the FPPC said that AJS (the entity at the top of the chart) raised its money for the purpose of funding issue ads that did not expressly advocate for or against a ballot measure. As such, the sources of the funds it raised were not disclosable.
  • The FPPC also said that the money AJS gave to CPPR was not earmarked for specific ballot measure, so it too was not disclosable.

Indeed, the FPPC made the remarkable statement that, “ARL’s disclosure of AJS as the source of the contribution prior to the election [as the result of the FPPC’s lawsuit] was erroneous.” In other words, during litigation brought by the FPPC on the eve of the election to determine the source of ARL’s funds, neither ARL nor CPPR was required to disclose AJS as the source of their funds!

Takeaways: This case demonstrates that the FPPC is going to be tenacious with respect to contributions that pass through nonprofits. It seems to be willing to engage in extensive litigation in order to force disclosure even when disclosure is not ultimately required. Moreover, it is willing to disparage defendants in its press releases even when the settlement documents make clear that the reporting violations were at worst negligent. Bottom lines:

  • If you donate to entities that may contribute to California campaigns, be aware that your contribution may be disclosed.
  • If you are an entity giving to a California campaign, be prepared for litigation with the FPPC.
  • If giving to a California campaign, if possible, set up procedures and keep records to demonstrate that sources of funds do not have to be disclosed so that you can response to the FPPC.
  • Consider whether over-disclosure at one level might make litigation less likely and result in less disclosure from initial sources.