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.


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.

With donors now allowed to give unlimited sums to Super PACs and other political advocacy groups, the biggest issue in campaign finance regulation is what such groups must disclose about their fundraising and spending, and when.  Some states have moved aggressively to bolster their disclosure rules, with a couple of states filing suit to force groups engaged in election spending to unmask their donors. 

The federal response has been a different story, with no consensus on a path forward, let alone agreement that new disclosure rules are necessary in a post-Citizens United world.  A little-noticed statement released by the three Republican Commissioners of the Federal Election Commission (“FEC”) suggests that groups active in 2014 may actually find it easier to avoid registering as Super PACs and disclosing their donors. 

The 26-page statement explains the Commission’s dismissal of a complaint charging that American Issues Project (“AIP”), a 501(c)(4), failed to register with the FEC and file reports as a federal political committee.  AIP spent over $2.8 million in the 2008 election on ads attacking then-candidate Barack Obama.  The two Democrats on the Commission found reason to believe a violation had occurred – the sixth seat on the Commission is vacant right now – but that left the matter short of the votes necessary to move forward. 

How does a group that spends almost $3 million on negative campaign ads avoid registering and filing reports as a federal political committee – or as it would be characterized if it registered today, a Super PAC?  Because, according to the three Republican Commissioners, AIP’s “major purpose” – the Constitutional test for determining when a group is acting as a political committee – was not influencing federal elections.

First, the Commissioners noted AIP’s self-described mission, as reflected in IRS and corporate filings, which was to advocate for conservative principles, including limited government, lower taxes, and a strong national defense.  Thus, the Commissioners reasoned, AIP’s “central organizational purpose” related to issues, not federal candidates.

Second, according to the three Commissioners, AIP’s spending showed that its major purpose was not to nominate or elect federal candidates.  In each of its fiscal years (which ran from May 1 to April 30), AIP reported combined spending on “management and general expenses,” “fundraising expenses,” “program services, and other activities in excess of the amount it spent on express electoral advocacy. Even looking only at “non-overhead” expenses, the Commissioners concluded that the $2.8 million ad buy represented slightly less than 45% of AIP’s total spending from the organization’s inception in 2007 until it ceased operating in 2010.  To determine a group’s major purpose, the Commissioners wrote, spending must be viewed over time, not within a single calendar year.

Where does this leave things for advocacy groups in 2014?  The AIP case may prompt more organizations to forgo registering and reporting as Super PACs, opting instead for the 501(c)(4) form that generally does not require disclosing donors.  Such groups will have to be careful in publicly describing their activities and ensure that over the long term their expenses for express electoral advocacy are exceeded by their combined expenses for everything else. While a future complaint will likely be considered by a new group of FEC Commissioners, the Commission has traditionally been reluctant to impose penalties for conduct that it found in a prior case did not violate the law. 

But even if an organization manages to skirt registration and reporting as a federal political committee, it cannot escape FEC rules entirely.  The organization must file 24- and 48-hour independent expenditure reports that itemize its spending on express electoral advocacy and must include disclaimers on such advertising.  Also, regardless of whether it operates as a Super PAC or 501(c)(4), a group must be careful to observe coordination rules that can treat certain spending as a prohibited in-kind contribution to a campaign or political party.  Finally, a 501(c)(4) group must navigate IRS rules that prohibit such organizations from making intervention in political campaigns its primary activity.  The IRS “primary activity” test is not the same as the FEC’s “major purpose” test and can be just as difficult to apply. 

In speaking for the Supreme Court’s majority in Citizens United, Justice Kennedy lauded the benefits of prompt disclosure, noting that it enables shareholders to make informed decisions and “citizens can see whether elected officials are ‘in the pocket’ of so-called moneyed interests.”  While these general principles are widely accepted, the stakes as to how disclosure should work, and when anonymity is permissible, are much higher now that groups may raise unlimited sums from individuals and corporations. The AIP case suggests that it may be some time before disclosure meets Justice Kennedy’s ideal.

Nonprofit groups raising money in New York are required by new rules to report nationwide spending on communications that support or oppose candidates and ballot initiatives, or that simply refer to candidates within certain periods before an election. When a group spends more than $10,000 on such communications in regard to New York state or local elections, it must also itemize these expenditures and disclose donors of $1,000 or more.

The new disclosure obligations apply to nonprofits that raise funds from New York residents and thus were already required to register and file annual reports with the New York Attorney General’s Charities Bureau. According to New York Attorney General Eric Schneiderman, the rules principally target 501(c)(4) organizations that use so-called “dark money,” a term that describes political spending that is not publicly disclosed under federal or state election laws, or federal tax laws. 

Section 501(c)(3) organizations are exempt from the new disclosure requirements even if otherwise required to register and file annual reports. Membership organizations that only solicit their own members are exempt from the annual reporting requirements, and therefore are also exempt from the new disclosure obligations.

These new rules pose significant
fundraising and compliance challenges for nonprofits because of their nationwide reach, applicability to grassroots lobbying communications, and requirements for donor disclosure. 

We have prepared a client alert that addresses the new rules more fully and offers tips for compliance. See more here.

Obviously the IRS has spent a great deal of time trying to determine whether certain groups qualify for exemption under Section 501(c)(4) of the tax code. Why 501(c)(4) status matters so much is really about disclosure and not about tax revenue at all.

Unlike contributions to Section 501(c)(3) organizations, contributions to 501(c)(4)s are not deductible by the donor. Thus, the tax consequences flow to the recipient, not the donor. That is, the recipient does not have to pay taxes on its revenue. There is another part of the tax code, Section 527, that allows political organizations not to pay tax on the revenue they spend for political activities, meaning that there is very little tax difference between a 501(c)(4), which is limited in how much political activity it can conduct, and a 527, which can spend every penny it brings in on political activity.

So why does it matter which section of the tax code applies? Disclosure. To understand how we got here, a little history is needed.

The late 1990s and the rise of the 527

Rewinding to a time when we were still going to party like it’s 1999, there were major limits on a 501(c)(4)’s federal political activity. Specifically, the Federal Election Campaign Act (“FECA”) prohibited corporations from making “independent expenditures” that expressly advocated the election or defeat of candidates. Thus, most 501(c)(4)s were not permitted to make independent expenditures. In other words, although under tax law a 501(c)(4) could engage in limited political activity (as long as it was not its primary purpose), it could not do so under campaign finance law. 501(c)(4)s could, however, engage in issue advocacy, which could refer to candidates.

The IRS’s concept of campaign intervention is broader than just “express advocacy.” Thus, many groups that were engaged in activities that looked a lot like campaign intervention, even if they did not expressly advocate, chose to organize under Section 527. There were no disclosure obligations in that section of the tax code, so it really was a function of choosing which bucket the organization fit into: 501(c)(4) or 527. Even if the IRS were to challenge a 501(c)(4) on the basis that its primary purpose was campaign intervention, the result would have been to categorize it as a 527, and little or no additional tax likely would have been due.

In reality, during this time, many donors simply gave large contributions to the national political parties because they could accept “soft money.” This funded “issue ads” that were often thinly-veiled efforts to support or oppose candidates. 

527 disclosure

Over time, more and more groups organized under Section 527 and avoided registering as political committees under FECA. They did this by avoiding express advocacy in their public communications. Thus, they could accept unlimited individual and corporate funds, and not disclose their donors or their expenditures anywhere. 

Congress reacted to this perceived loophole by passing a law that required organizations claiming to be exempt under Section 527 to register with the IRS and, if they were not otherwise required to disclose their donors and expenditures (with the FEC or a state), file regular disclosures with the IRS.

Thus, even if 527s avoided registering with the FEC – which was important from the standpoint of not being subject to contribution limits of $5,000 per person per year and no corporate contributions – they would still have to disclose donors publicly.

Shortly after the 527 disclosure provisions were added, Congress enacted the Bipartisan
Campaign Reform Act
, which prohibited the political parties from accepting
soft money. Thus, the only real outlet for those who wished to make large political contributions was 527 committees.

Citizens United

In January 2010, the Supreme Court changed everything by allowing corporations to make independent expenditures. Now 501(c)(4)s could engage in express advocacy, as long as campaign intervention was not their primary purpose. And, 501(c)(4)s do not have to disclose their donors. There are still FEC disclosure obligations for 501(c)(4)’s that make independent expenditures or raise money through explicit calls to elect or defeat a candidate, but through careful crafted messages disclosure can often be avoided. 

The IRS controversy

Which brings us to why the IRS needs to know about the political activities of a 501(c)(4) organization. If the 501(c)(4) should actually be a 527, the overall tax consequences are minimal. But, the disclosure consequences are extreme. As a 501(c)(4), an organization can make independent expenditures but avoid disclosing any information about its donors. A 527, on the other hand, has to disclose all of its donors, either to the IRS or to the FEC as a super PAC (or to a state, but this post focuses on federal campaign activities). If the IRS were to deny exempt status to a 501(c)(4) and determine it should be a 527, then it may face penalties for not registering and reporting with the IRS.

In sum, the consequence of whether any of the Tea Party groups involved in this controversy satisfied the requirements of a 501(c)(4) organization or were better classified as 527s was whether their donors had to be disclosed or not. We will discuss at another time whether the tax code is really the best way to deal with disclosure issues.

Last week, Lois Lerner, the now suspended Director of Exempt Organizations for the IRS, appeared before the House Oversight Committee. She gave a brief opening statement, in which she proclaimed that she had “not done nothing wrong” and that she had “not broken any laws.”

Her lawyer had already informed the Committee that she would refuse to answer questions so as not to incriminate herself. When the Committee began asking questions, she did as promised and refused to answer.

Now there is a debate among legal experts as to whether, by making her opening statement, she waived her Fifth Amendment right against self-incrimination. Some experts, including Alan Derschowitz (BNA subscription required) have said she waived her right to not to answer questions, while others, such as a former counsel to the House of Representatives (BNA subscription required) have suggested she did not.

Whether she waived or not, the important thing to remember is why one would take the Fifth, and how to do it successfully, so that legal experts aren’t debating it for all to see.

Why take the Fifth?

Why would someone want to refuse to testify? Primarily if they would be forced to make statements that could potentially incriminate them in a criminal activity. Such self-incrimination can arise in response to being asked to explain a document submitting false information to a regulator (a violation of 18 U.S.C. § 1001), being asked questions about committing a crime, or being asked to explain contradictory statements made to the government (and therefore admitting to committing perjury).

How to do it?

Leaving aside the specifics of the Lerner situation, there are three parts to a successful effort to refuse to answer questions. One is legal, one is political or public-relations oriented, and the third is practical. All three are equally important.

Refusing to Answer Gracefully: Developing a working relationship with the committee may help avoid sitting at the witness table and being forced to refuse to answer questions, both publicly and repeatedly. Possible approaches might include providing documents requested (note that producing documents pay be privileged in certain circumstances and this must be done very carefully), having corporate entities answer written questions (corporations have no right not to incriminate themselves), and providing witnesses to the Committee who have relevant information but who do not face criminal exposure.

Once that working relationship is forged, then the witness’s lawyer can discuss with the Committee that his or her client will have to refuse to answer questions. Although a letter may be required, this often starts with informal conversations or calls. Discussions about how many questions the Committee will answer before dismissing the witness are also helpful.

Legal Considerations: As the Lerner controversy makes clear, the best way to avoid questions of waiver is simply to not make any opening statement at all beyond providing the witness’s name and thanking the Committee for holding the hearing. Even before the hearing, responding to staff questions or sitting for an interview can effectuate a waiver. Thus, written responses should come from the lawyer or a corporate entity—not the witness personally (of course, this may require separate counsel for the company and the witness).

Practical Considerations: At the hearing, invoke the privilege to any and all questions asked. As some witnesses have discovered, selectively invoking the right may subject them to extensive depositions. Finally, as this witness found out, once you invoke your Fifth Amendment rights, leave.


(you can watch this exchange from the Senate Homeland Security and Government Oversight committee here, starting at about minute 42)

At the end of the day, the prospect of a witness having to refuse to answer a string of questions before the cameras may simply be too tempting a target for a Committee to pass up. But with careful groundwork and legal maneuvering, the risks of waiver can be minimized and the bad publicity contained.

It seems the IRS controversy has spilled into the states. Late last week Governor Rick Perry vetoed legislation
 that would have required the disclosure of high-level donors by many politically active organizations, including those exempt under Section 501(c)(4) of the Internal
TexasRevenue Code. After a Republican legislature passed the bill, there was a fevered
internet grassroots campaign urging him to veto it. Ultimately, Governor Perry rejected the bill, citing the recent IRS controversy as one of his reasons.

In reality, the two seem to have very little to do with one another – state disclosure obligations and federal income tax status involve different bureaucracies, different tests, and different legal interests. But, perhaps the fear of bureaucratic meddling into core First Amendment activities and the disclosure and harassment of donors could be a sign of a more hands-off approach to politics.

The veto bucks the recent the trend of state legislatures imposing new disclosure requirements on tax-exempt organizations that engage in political activities. The bill would have required persons or organizations (excluding labor organizations) that make political expenditures (e.g.,
independent expenditures) exceeding $25,000 during the calendar to disclose donors who contribute over $1,000 and file regular reports. Current law requires these organizations to disclose only their political expenditures over $100. 

It remains to be seen whether other states will feel similar legislative effects of the IRS controversy, or whether donor-disclosure laws will continue to be the new norm.

It’s been less than three weeks since the IRS admitted to targeting applications for tax-exempt status filed by some conservative organizations. Much has happened since then on both the personnel front and with congressional oversight hearings.

On the personnel front, the acting IRS commissioner (Steven Miller) resigned and the President named a new acting commissioner. The IRS commissioner of tax exempt and government entities (Joseph Grant) announced his retirement effective June 3, and the director of exempt organizations (Lois Lerner) was placed on administrative leave.

In addition to personnel changes, three congressional hearings have been held. The House Ways and Means Committee was the first, held just seven days after the news broke. At this hearing, the then-acting IRS Commissioner admitted that “foolish mistakes were made,” in reviewing tax-exempt organizations for additional scrutiny, but denied that the process was partisan.

The acting Commissioner and two other IRS officials were before the Senate Finance Committee on May 21. The next day, the House Oversight Committee called as witnesses several current and former top IRS officials as well as the Treasury Secretary. This hearing drew much attention because of Ms. Lerner’s emphatic denial of wrongdoing and assertion of her Fifth Amendment right against self-incrimination in response to the Committee’s questions. The hearing also drew attention because several committee members publicly scolded the Inspector General (IG) for failing to turn over information to Congress when problems were first discovered in May 2012.

These hearings revealed two pieces of important information: first, senior IRS officials knew as early June 2011 that certain groups were flagged for additional review based on certain keywords. Second, email exchanges between IRS officials revealed that they recognized that singling out such groups was problematic. Although the hearings have occurred in a short period of time and have revealed important information, we expect more hearings in the near future.

For more detailed analysis of the IRS fallout, click here to listen to a radio interview Jeff Tenenbaum, the chair of Venable’s non-profit practice group, did with the Inner Loop. More certainly to come.

On May 10, 2013, the nonprofit tax bar – and much of the country – was rocked by reports that Lois Lerner, director of the Internal Revenue Service’s Exempt Organizations Division apologized for the Service’s inappropriate flagging of conservative political groups for additional review during the 2012 election season. She made this apology in response to a question from longtime nonprofit tax attorney Celia Roady at the annual meeting of the American Bar Association’s tax section in Washington, DC. Lerner admitted that would-be tax-exempt entities that included the words “Tea Party” or “patriot” in their applications for recognition of exempt status were singled out for additional scrutiny, including burdensome questionnaires and, in some cases, improper requests for the names of their donors.

And on May 14, 2013, the Treasury Inspector General for Tax Administration released his report on the issue, concluding that “[e]arly in Calendar Year 2010, the IRS began using inappropriate criteria to identify organizations applying for tax-exempt status to review for indications of significant political intervention.” The report said that “[t]he IRS . . . identified for review Tea Party and other organizations applying for tax-exempt status based upon their names or policy positions instead of indications of potential political campaign intervention.” Would-be 501(c)(4) exempt organizations are permitted to engage in some political campaign intervention, but it cannot constitute the primary activity of the organization.

There has been no evidence to date that the IRS made approval or denial decisions regarding these exemption applications based on these criteria, but the fact that additional scrutiny was leveled on this basis alone is, without question, very troubling. The IRS must enforce the tax-exempt provisions of the federal tax code – especially if there are signs of abuse – but the Service has a strict obligation to do so objectively, without bias, and without regard to political viewpoints.

The IRS has undertaken major compliance projects targeting certain sectors of the tax-exempt community. Colleges and universities and credit counseling agencies are two recent examples. In fact, the IRS’ final report on its college and university compliance project was just released last month (click here to read Venable’s article on the report). In conducting such reviews, the IRS certainly had to use criteria to identify the colleges or universities, or the credit counseling agencies, to be subject to such scrutiny. Sometimes the name of an entity easily identifies itself as falling into a particular category, but sometimes it does not.

In the current firestorm, it is not at all clear how an entity’s name suggests whether it will be engaged in prohibited political activity. It is understandable that, for efficiency reasons, the IRS tried to find ways to more easily identify would-be exempt organizations that might be engaged in impermissible political campaign activity (perhaps it could have focused on those groups that checked the box on the exemption application stating  they would engage in political activities). That being said, there is no question that the manner in which the IRS went about doing so was wholly inappropriate.

There are legitimate concerns that organizations are using their 501(c)(4) tax-exempt status to engage in political activity that exceeds the current limits. Many in Congress have raised this as an issue. Thus, we can expect more attention by the IRS and others in this area.

In the end, are there any lessons for the broader tax-exempt community? Yes, but until the Treasury Inspector General’s report is digested, it is too soon to say. More to come on that front in the coming weeks. But to nonprofit attorneys like this author – someone who works very closely with the IRS Exempt Organizations Division – this is a rare instance of a very public spotlight being shined on a world that is usually reserved for the inside-baseball players that reside in Washington.

It seems like it has been a while since Congress has passed major, substantive legislation. With gun control, immigration, and tax reform all on the front pages, it appears that legislation might be on the move. Thus, as legislation grinds through the process, it is worth remembering the need to keep legislative issues separate from fundraising efforts. The House Ethics Committee has provided some specific advice about this.

Fundraising Around Major Financial Services Legislation

In 2011, the House Ethics Committee issued a report exonerating several Members of Congress for their fundraising practices. Specifically, the Ethics Committee looked at whether fundraisers held in close proximity to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act were permissible under the House Rules.

Background Rules

The Ethics Committee started with the premise that “the public also has a right to expect that its elected leaders will take official action on the merits of issues and without regard to extraneous factors, such as campaign contributions.” To that end, the Committee explained that “a Member should avoid official conduct that would appear to a reasonable, thoughtful, and well-informed person to be improperly connected to campaign activities.” Specifically, this means:

  • A solicitation for campaign or political contributions may not be linked with an official action taken or to be taken by a House Member or staff, which includes all legislative activities.
  • A House Member or staff may not accept any contribution that is linked with an official action that a Member has taken or is being asked to take.
  • A Member should not sponsor or participate in any solicitation that offers donors any special access to the Member in the Member’s official capacity.
  • Members should not make any solicitation that may create even an appearance that, because of a campaign contribution, a contributor will receive or is entitled to either special treatment or special access to the Member in his or her official capacity.

Organizing Events to Avoid Appearance Issues

In analyzing the fundraisers that were held in close proximity to the vote on the Dodd-Frank legislation, the Ethics Committee considered several factors to determine that the Members had, in fact, lived up to these ethical obligations. Specifically, the Committee found that:

1. There was separation between fundraising activities and legislative activities because the Members had hired professional fundraising consultants to manage all aspects of the fundraising events.

  • The consultants had no interaction with the legislative staff.
  • The events were planned well in advance of the vote and bill consideration.
  • Invitations were sent to broad, cross industry donors (although many who attended were financial services lobbyists). The Committee made clear that industry-specific events are permissible, but that if held in close conjunction with major legislation of interest to that industry, there is a greater risk of appearance issues.
  • Members often did not know about the events until a day before or the day of the fundraisers.

2. Each member had consistent and well-established legislative positions on the bill before and after the fundraising events.

3. Member’s legislative actions were based on significant legislative concerns, which did not stem from requests from donors.

4. The events were brief, without any substantive legislative discussion regarding Dodd Frank between the Members, staff, and attendees. The Committee contrasted this with a multi-day event held by a former Majority Leader at which specific input was sought about energy legislation, which the Committee had found unacceptable.

5. Timing of the Dodd-Frank votes was in flux, and the timing of the events was coincidental.

Thus, as associations, companies, lobbyists, and others plan fundraising events, they should keep these principals in mind to avoid questions—especially if their lobbying efforts turn out to be successful. Remember, lobbyists have been prosecuted for making lawful contributions, when they had an improper intent, so careful planning that separates fundraising from legislative action is important.