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threat to file a lawsuit the same day, the Order will have little practical effect, and the threat of a lawsuit was withdrawn.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?

Many issues important to public charities are addressed in the platforms adopted by the political parties. As Republican, Democratic, and Libertarian parties wrap up their conventions and the Green Party meets this week, charities are asking how they can talk about the issues raised in the platforms. Charities can advance their position on the issues that they had been advocating before the platforms were adopted; however, they should consider carefully whether to opine specifically on the positions of candidates and the political parties.

Section 501(c)(3) of the federal tax code strictly prohibits all charities from engaging in activities to support or oppose candidates for public office. However, public charities, in particular, can advance public policy goals—many involving specific legislative solutions that are in the platforms.

The Internal Revenue Service (IRS) and, ultimately, the courts evaluate whether a charity improperly engages in candidate campaigns by considering the context. Could the charity’s statements about policy and candidates or political parties reasonably lead an audience to believe the organization has an opinion on the candidate or party? Facts and circumstances are considered in the context of the statement and the issue.

In considering the statement:

  • Does it identify one or more candidates or parties or express approval or disapproval for positions of a political party platform or candidate?
  • Is it delivered close in time to the election or make reference to voting or the election?
  • Is the timing of the statement instead linked to a specific legislative action by an officeholder who happens to be a candidate?

In considering the issue addressed in the statement:

  • Has the position on the issue been raised to distinguish between parties or candidates?
  • Is the issue part of an ongoing series of communications by the charity on the same issue without regard to the election?

There is a safe zone for a charity that has previously advocated for a policy position that later becomes a political party platform issue or the subject of a candidate’s position.

A charity can:

  • Use earned and paid media to advocate for the charity’s position on an issue;
  • Call for all candidates and parties to support the charity’s position without calling out particular parties or candidates or mentioning the positions they’ve already taken;
  • Send materials to all candidates and party leaders to educate them about the charity’s issues;
  • Invite all candidates in a race to meet with charity leaders to discuss the issue and visit the charity’s facilities or work projects; and
  • Ask its members or the public to educate all candidates on the charity’s issues.

Charities should take care when:

  • Inviting a current officeholder who is also a candidate to a public event of the charity;
  • Naming an officeholder in paid advertising who is up for election, because of federal and state election laws that regulate campaign speech and may be triggered, requiring disclosure and other requirements close in time to the election;
  • Holding panel discussions or debates with candidates; or
  • Providing an “open forum” on social media about issues without careful monitoring or control of comments posted.

Charities should avoid:

  • Publicizing the positions of political parties and candidates on issues on which the charity has taken a position; and
  • Holding debates or developing voter guides limited to a small set of issues, such as environmental topics, on which the charity has taken a position.

Planning and Executing Activities Involving the Candidates, Parties, and Their Positions

Many activities—such as debates, voter guides, and voter registration—can also be considered by a charity on a broad range of issues of interest to the public. The key is to remember that these activities must be nonpartisan, and not favor one candidate over another. In addition, charities should consider their underlying mission and determine whether activities like general voter education are reasonably part of the chartered purpose of the charity.

Unfortunately, the line between prohibited and permissible activities for a 501(c)(3) organization is murky and can easily be crossed if not properly managed. Careful planning, clear communication about the limitations of all involved, and control in executing the activity are critical. Now might be a good time to review the rules that will help your charity stay on the right side of the line while involved in the process.

If done correctly, 501(c)(3) organizations can:

  • Help register voters;
  • Conduct get-out-the-vote activities;
  • Publish voter guides on a broad range of issues of interest to the public;
  • Create candidate questionnaires on a broad range of issues of interest to the public;
  • Host candidate appearances that are not debates;
  • Host debates on a broad range of issues of interest to the public;
  • Conduct issue advocacy;
  • Allow leadership and staff (on their own time) to be politically active; and
  • Create an affiliated organization to engage in political activities that they cannot.

Continue reading for more information on prohibited intervention and permissible activities.

SpiderWebAs we have discussed, Maryland amended its pay-to-play rules to impose new reporting requirements on entities that do business with state or local governments. The first report under the new system is due on February 5, and if the roundtable hosted yesterday by the State Board of Elections is any indication, confusion abounds regarding the law’s core requirements.

This post highlights a few of the issues discussed at that roundtable.   Continue Reading Oh What a Tangled Web Maryland Weaves: Updates on the Pay-to-Play Disclosure Process Before February 5 Report is Due

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.

Last week, the U.S. Government Accountability Office (GAO) released its long-awaited report on the gathering and use of so-called “political intelligence.” While the report targets the role of political intelligence in the financial markets, it may fuel attempts to regulate this growing Washington industry by using federal lobbying laws as a model. The report also underscores the risks of trading on non-public information about potential government action.  

The Stock Act

The report was required by the Stop Trading on Congressional Knowledge Act (STOCK Act), which was enacted after reports surfaced about Members of Congress profiting from trading securities based on inside information obtained while performing their official duties. The legislation mandated lengthy and cumbersome financial disclosures by government employees, which has been challenged in court.

There was also concern that investment advisers – particularly hedge funds – were able to profit from access to legislative or regulatory information (so-called “political intelligence”). The STOCK Act did not regulate the gathering and use of political intelligence (earlier versions of the bill included registration and reporting obligations by political intelligence firms), but instead required GAO to conduct a study.

Political Intelligence

The STOCK Act defines political intelligence as information:

“derived by a person from direct communications with an executive branch employee, a Member of Congress, or an employee of Congress; and provided in exchange for financial compensation to a client who intends, and who is known to intend, to use the information to inform investment decisions.”

The GAO Report noted that it is very difficult to determine:

  • When “political intelligence” is based on nonpublic versus public information,
  • When information is derived from a “direct communication” (is attending a  town-hall meeting or a hearing “direct communication?), and
  • Whether information remains political intelligence when it is mixed into a report containing analysis, media information, and other research.

Insider Trading

Profiting from material, non-public information is a federal offense under Rule 10b-5 of the Securities Exchange Act. In the context of government information, it can be difficult to determine when information is public or not and when information is material or not.

The GAO report provided two real-world examples to highlight an obvious case that resulted in a criminal  prosecution and another that raises more questions than it answers. In the first, an FDA official bought or shorted drug company stocks based on his knowledge of drug approvals or rejections. In the second, investors bought stock in companies that would benefit from legislation that would limit their liability for certain pending claims. The investors apparently purchased the stock after learning (before the general public) that a key Senator would support the bill. Although the legislation never became law, investors may have profited from their access to the information because they were able to purchase the stock before the public became aware of the Senator’s support and the stock prices did rise after the Senator spoke in favor of the legislation.

These two examples are helpful bookends for illustrating when information is material or not (it certainly was in the FDA example) and whether information is public or nonpublic (it was not public in the FDA case, but might have been in the legislative case), but there are a very broad range of examples in between. It is that range that makes it difficult to know when political intelligence crosses the line into insider trading. The report strongly reaffirms that that it is a violation of federal insider trading laws to buy or sell securities based on material, non-public information, including political intelligence.

Disclosing Political Intelligence Gathering?

The report also looked at whether political intelligence should be a regulated industry—like lobbying—that requires disclosure. The GAO Report considered the pros and cons but did not make a recommendation either way. Even some government watchdogs who provided input to the GAO questioned exactly what would be gained by disclosure.

The Takeaway

The report is a reminder that persons who use political intelligence to inform investment decisions must take precautions to make sure their information is not “material, non-public information.” This holds true regardless of whether the political intelligence is obtained directly, or from a third party or consultant.

In addition, it is possible (if not probable) that a registration requirement will be instituted for individuals and firms that engage in political intelligence activities. If implemented, such a regime is likely to be similar to the registration regime for lobbying activities under the Lobbying Disclosure Act. Persons who use political intelligence should consider whether they are comfortable disclosing their political intelligence activities and the effect that might have on business.

On December 11, New York’s attorney general revealed new regulations that would, if adopted, require nonprofit groups doing business in New York to disclose the percentage of total spending devoted to political activities in New York. The rules also would require groups that spend more than $10,000 to identify any donor giving $100 or more.

Under the proposed rules, tax-exempt organizations registered—or required to be registered—under New York’s charitable registration law must include in their annual financial report the amount and percentage of total expenses during the reporting period that are New York “election related expenditures.” “Election related expenditures” include communications calling for the nomination, election or defeat of a clearly identified candidate, political party, or proposition in a New York election. They also include communications made within 180 days of a New York election that refer to one or more clearly identified candidate in that election or depict the image, name, or likeness of a candidate. The term “communication” covers paid broadcast advertisements, placement of content on the internet, print ads, telephone contacts, mailings and other print materials.

Of particular concern to nonprofits, especially 501(c)(4) groups, is the prospect of having to disclose their individual donors. The proposed rules state that a group that has made over $10,000 in New York election related expenditures must disclose the following information about each “covered donation” received within the applicable reporting period:  (1) the name and address of each donor who made donations of $100 or more (in the aggregate) during the reporting period, (2) the donor’s employer, and (3) the date and amount of each donation. A “covered donation” is any contribution or thing of value made to a non-501(c)(3) tax-exempt group doing business in New York that is available to be used for a New York election related expenditure. In other words, the donation does not actually have to be used or intended for New York election related expenditures in order to be subject to disclosure.

The proposed rules would, however, exempt from disclosure donations that are restricted in a way that prevents them from being used for electioneering. The proposal also includes a process by which a group can seek a waiver if it can show that public disclosure of a contribution or donor’s identify could cause undue harm, threats, harassment or reprisals.

Written comments on the proposed rules may be submitted until March 6, 2013, with final rules expected to be in place in time for the 2013 local elections.

Close on the heels of a revocation we noted in a recent post comes yet another IRS ruling revoking 501(c)(4) status of a politically-active organization.  In Private Letter Ruling 201224034, the IRS concluded that the organization was primarily benefiting the personal political and policy interests of the organization’s founder.

The ruling does not directly address the growing controversy surrounding (c)(4) political activity this election season—that is, whether the organization engaged in too much political activity to qualify for (c)(4) status. Under current law, a 501(c)(4) social welfare organization may engage in campaign activity without jeopardizing its tax-exempt status, provided that this is not its “primary” activity. In this latest ruling, the IRS went only so far as to intimate that perhaps the organization’s primary activity was to engage in political campaign intervention, noting that the organization had failed to show that its primary activity was not political.

The crux of the ruling was instead that the organization served primarily as a platform for advancing the policy and political interests of the organization’s founder and sole officer and director, who previously ran for and held public office. On the facts, the IRS’s conclusion is fairly unremarkable. More interesting is the IRS’s reliance on private benefit—a doctrine borrowed from the law governing 501(c)(3) organizations—to deny once again exempt-status in the (c)(4) context.

If these recent rulings are any indication, the IRS appears to be aggressively pursuing extension of the private benefit doctrine to 501(c)(4) organizations, which could portend trouble for politically-active (c)(4)s. With the private benefit doctrine in the IRS’s arsenal, it may be irrelevant how much of an organization’s activities are devoted to political campaign intervention. Instead, the IRS could deny (c)(4) exempt status if the facts and circumstances suggest that the organization primarily serves to benefit a particular candidate or political party.