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Independent Expenditures

Louisiana imposes an aggregate limit of $100,000 on a person’s contributions to a political committee in Louisiana during a four-year election cycle. An independent expenditure-only committee (i.e., a Super PAC) supporting gubernatorial candidate David Vitter sued, arguing that the cap is unconstitutional as applied to super PACs. A federal judge has now agreed.

“[I]ndependent expenditure committees are sacrosanct under the First Amendment.”

The Louisiana judge sided with the unanimous rulings of seven federal courts of appeals that have struck down limits on contributions to Super PACs. Based on these rulings, and the Supreme Court’s landmark Citizens United case, the judge observed that as a matter of law “independent expenditures present not even a marginal risk of corruption,” a principle that holds even if the Super PAC is formed to support a single candidate.

Continue Reading Another One Bites the Dust

As discussed last fall, against the fairly settled case law around the country, New York continued to fight against Super PACs. A Super PAC is a political committee that typically funds ads advocating for or against candidates, but that may not coordinate its spending with candidates and their campaigns. New York argued that its annual limit on total contributions an individual may make to all New York political committees of $150,000 applied to independent expenditure-only Super PACs. A Super PAC that wanted to support a New York City mayoral candidate in last November’s election challenged that law, but lost in the lower court.  The U.S. Court of Appeals for the Second Circuit reversed that decision saying, “[f]ew contested legal questions are answered so consistently by so many courts and judges.” Yet New York continued to fight when the case went back to the lower court.

Yesterday, the district court held that limits on contributions to the plaintiff are unconstitutional, stating: “[o]nce it is determined that [plaintiff] is an independent expenditure-only organization, there is little left for the Court to do.” It was clear from the judge’s opinion that he did not like this result, but felt bound by Supreme Court precedent (both Citizens United and the recent McCutcheon decision).

It’s not clear what New York will do next. It seems futile to appeal further, so the logical step would be for the State to announce that it will no longer enforce the limits on individual contributions to all Super PACs. If the state does not announce that it will no longer enforce the limits, other groups will likely file suit to obtain the benefits of these decisions for themselves.

There is another outstanding issue as well that is winding through the courts: does a separate aggregate cap of $5,000 on corporate contributions apply to contributions to Super PACs? That issue is currently before the U.S. District Court for the Northern District in New York. The plaintiffs in that case recently informed the court that, although not the relief they requested, McCutcheon calls into question New York’s aggregate cap on individual and corporate contributions in any application. The State replied that it is reviewing McCutcheon and will respond. If the court overturns the corporate aggregate cap, either as-applied to Super PACs or across the board, then New York would come into line with most other jurisdictions just in time for this November’s gubernatorial election.

* Admitted in Maryland; not yet admitted in D.C.

soft moneyOne of the key aspects of the McCain-Feingold law was the elimination of soft money to the national party committees (that is, the DNC, RNC, and each party’s congressional and senatorial committees). Reformers (and some corporations that resented being hit up by the parties for donations) praised this aspect of the law and others bemoaned the loss of influence of the parties.

Although outside groups tried to fill the void, they could only accept unlimited sums from individuals and corporations if they refrained from expressly advocating for or against candidates. After Citizens United and the cases that followed, which allowed independent expenditure only committees, the gloves came off, and the independent groups were permitted to raise unlimited individual and corporate funds. This further tipped the scales away from the parties, which could collect only limited personal contributions.

Although some states allow for corporate contributions to their party committees, many do not, and a similar situation arose for state elections. There were signs that party leaders around the country were forming independent expenditure committees that were ostensibly separate from the party, even though they had some overlapping leadership. The Tenth Circuit blessed such an arrangement late last year. In its opinion, however, the court cautioned that it did not think a party committee itself could create its own independent expenditure account. It reasoned that because courts have upheld restrictions on contributions to party committees to prevent corruption, an independent expenditure effort by the party would still be an effort by the party and could be regulated.

A decision from the Colorado Secretary of State may portend a slight change. Colorado currently prohibits corporate contributions to both candidates and parties and places limits on the amount that individuals may give. The Colorado Republican Party filed a petition with the Secretary of State asking whether it could create an independent expenditure committee. The Secretary answered yes, it could. In the opinion, the Secretary explained how the independent expenditure committee would have to operate so as to avoid coordination with the party. It went so far as to suggest that there may have to be limits on the party’s ability to remove the independent expenditure committee’s leadership. Moreover, officers and agents of the party who are not in the independent expenditure committee may not solicit corporate and unlimited contributions for the independent effort.

This opinion (which is not controlling on the courts, where enforcement cases are ultimately decided in Colorado) is an incremental change. Although others will likely use this opinion to try to open the doors in other states, it seems that at the end of the day, it will probably still be easier for party insiders to create organizations that are separate from the party. Time will tell. At the national level, it probably will not have much of an impact. Although the national parties operate independent expenditure efforts, those efforts are still subject to contribution limits. Short of major litigation, they will remain subject to those limits.

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.

It looks like at least one Super PAC will be active in the New York City mayor’s race after all. An appeals court has reversed a lower-court’s decision refusing to enjoin the New York law barring unlimited contributions to a political committee that makes only independent expenditures and not direct contributions to candidates.

The appeals court said that “[f]ew contested legal questions are answered so consistently by so many courts and judges.” The court cited 11 cases upholding the right to make unlimited contributions to independent expenditure committees.

The appeals court then criticized the lower court for focusing on the hardship to the electoral system and ignoring the harm to the Super PAC and its donors. The court explained that “[e]very sum that a donor is forbidden to contribute to [the Super PAC] because of this statute reduces constitutionally protected political speech.” As such, the court held that the harm to the plaintiffs was far greater than changing the contribution rules just before an election.

The ruling applies only to the named plaintiff, New York Progress and Protection PAC. It will be interesting to see whether the New York authorities announce that they will allow Super PACs to operate pending the final outcome of the case or whether they will seek an emergency appeal. Other organizations could also choose to rush into court to obtain their own injunctions or may simply start raising and spending money and take their chances.

In March 2010, following the Supreme Court ruling in Citizens United, a federal appeals court ruled that that a political committee making independent expenditures (i.e., not direct contributions or coordinated expenditures) has a constitutional right to receive unlimited contributions. The ruling triggered a proliferation of so-called Super PACs that have been active in federal and state elections. As we have previously discussed, however, not all states have followed suit, including New York. With the race for mayor of New York City just weeks away, a Super PAC that wanted to make independent expenditures in support of one of the candidates sued, arguing that its fundraising should not be subject to state limits on corporate and individual contributions. 

The court refused the request, finding that it was too close to the election to make a change. The court found that the record submitted by the plaintiff—all of five pages—was simply not a strong enough foundation for the court to strike down the law right before an election. Rather, the court held that the state should have the opportunity to develop and present its own record to defend the application of state contribution limits to independent expenditure groups. The court also was concerned with the limited scope of its authority. If it struck down the law with respect to the named plaintiff, would other independent expenditure groups be allowed to accept unlimited contributions too? The court cited other cases suggesting that a decision in favor of the plaintiff might not afford other parties the same relief, which would result in an unfair situation. Of course, this presumes that state regulators would not agree to apply the court’s decision to similarly situated groups and that another court would refuse to grant an injunction for another group.

The court chastised the plaintiff for waiting until the last minute to bring this case. In reality though, the primary election was held in mid-September, so a person would not have known for certain whom the candidates would have been until then. Moreover, an earlier challenge to the law is still winding its way through the courts, and the court appears to be waiting for the Second Circuit to decide a different case dealing with a similar issue. At least in New York and the Second Circuit, it seems that those challenging the laws are stuck if they try to challenge the law early and stuck if they try to use an expedited approach with the courts.

Emergency appeals have been filed, but unless Superman steps in to turn back time for the Super PAC, the likelihood that this case will be decided in time to make a big difference in the New York City election gets slimmer by the day.

 

A leaked email written by a senior Congressional aide became fodder for the politics section of the Washington Post last week, painting a picture of secret industry collusion with candidate campaigns on independent expenditures. The aide’s email, reportedly written to several of his boss’s campaign officials, explained that a prominent industry trade association was committed to an independent expenditure in support of the candidate, and wanted to be put in touch with the campaign.

The official reaction from both the trade association and the candidate’s campaign was that the aide was misinformed. According to the association, there was no such offer or commitment, although it had engaged in preliminary discussions about hosting an industry-sponsored PAC fundraiser for the candidate. The campaign explained that the aide “made inaccurate assumptions” about the type of assistance the industry group could provide the campaign, and that no communications took place between the campaign and the
association that would constitute coordination in violation of the federal campaign finance laws governing independent expenditures.

Perhaps by bringing the email to light the leaker sought and achieved some measure of damage control, allowing all involved to refute, publicly and contemporaneously, any inappropriate conduct. Even so, this kind of revelation can have damaging consequences. At the very least, there is plenty of embarrassment to go around. Worse, it could be a trigger for a government investigation.  The following lessons are worth keeping in mind:

  1. Assume that email will come to light. When your email ends up in the Washington Post, something has probably gone awry. But this should not be totally unexpected. Even without being leaked to a reporter, email is easily discoverable by government investigators. As this example highlights, don’t write anything in an email that you wouldn’t feel comfortable seeing in the newspaper.
  2. Talk to the right people and be clear in your communications. Under House and Senate Ethics rules, Congressional aides are not permitted to engage in campaign activities on official time or to use official resources for campaigning. While the ethics rules do permit aides to refer campaign-related inquiries to the campaign, any other campaign-related activities must be done voluntarily on their own time and using their own resources. In this example, the aide used his personal email account to communicate about the campaign-related matters. But that alone is not indicative of full compliance with the ethics rules. As a general rule of thumb, it is preferable to not discuss campaign matters with official staff. Take the time to identify the appropriate campaign officials and talk to them at the appropriate time. Above all, be clear in your communications with those officials about your interests and goals to avoid misunderstandings—don’t assume that they understand all of the nuances of the campaign finance laws.
  3. Know the rules on IE coordination. If your organization intends to engage in independent expenditure activities and doesn’t have a policy on coordination in place, now is the time to put one in place and provide training to everyone involved.

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.

State campaign finance laws change constantly, but not always this quickly. In late March, the New Jersey Election Law Enforcement Commission (ELEC) issued an advisory opinion stating that independent expenditure-only political committees (Super PACs) in New Jersey would be subject to the same contribution limits as other New Jersey political committees.

At that time, ELEC said that it lacked authority to decline to enforce the limits, even while recognizing that its decisions might well be contrary to a growing number of federal and state courts holding that contribution limits on independent groups are unconstitutional. But after being sued in federal district court for a temporary injunction by the same group who requested the advisory opinion, ELEC changed course. On April 25, ELEC consented to a preliminary injunction, prohibiting the agency from enforcing contribution limits against Super PACs in New Jersey. It has been reported that at its meeting last week, ELEC agreed to a permanent injunction from enforcing the limits, but this has not yet been formalized in court.

Also reported from that meeting is that ELEC will support legislation requiring independent expenditure groups to disclose their donors if they do not qualify as state political committees, which are already required to do so. We will monitor the legislation and provide updates as information becomes available.

Harvard Law School Professor Lawrence Lessig is well known for his work on intellectual property issues, having developed the Creative Commons licensing system. For the past several years, however, he has been focused on political corruption and the role of money in politics.

Professor Lessig recently gave a TED Talk, in which he described a country called Lesterland, where there are two elections for every position. One, in which only those named Lester get to vote, and the other, where all citizens are eligible to vote. The Lesters make up just .05 percent of the electorate, and so have a disproportionate power to pick the leaders of Lesterland.

Who are these Lesters? They are political donors, whom Professor Lessig thinks have an undue influence on our electoral process (as he puts it USA=Lesterland). It is an interesting, and very well done, talk, although it is focused more on Professor Lessig’s view of the problem than on offering any specific solutions.

Since most of our readers are probably Lesters, work for Lesters, or try to get people to become Lesters, it is worth a few minutes of your time to see what he thinks. Remember, this is not just a random academic delivering a lecture in the ivory tower, but a man who has introduced proposals for major changes in other areas—and gotten them implemented—so understanding his position on money in politics is important.

What affect will Professor Lessig have on your ability to participate in the process as a Lester?