Please join us for a networking lunch and program (also available as a webinar) on April 29, 2014, at 12:00pm EDT in our Washington, D.C. office, which will provide a timely roadmap for nonprofit organizations that engage or are thinking about engaging in the political process. We will cover topics that you should be thinking about for the mid-term elections and beyond:

  • The rules that apply to 501(c)(4) and 501(c)(6) organizations and how those rules are changing
  • How to operate a political action committee (PAC), including guidelines for fundraising and advocacy communications
  • Specific activities that 501(c)(3) organizations can and cannot engage in, and how the proposed IRS rules for 501(c)(4)’s may impact 501(c)(3)’s
  • Rules on coordinating activities with campaigns and political parties
  • How successful enterprises can combine a 501(c)(3), 501(c)(4) and/or 501(c)(6) organization, a PAC, and even a Super PAC

We will also discuss McCutcheon v. FEC, the Supreme Court’s recent decision striking down aggregate contribution limits, and how it could influence your electoral strategy in 2014.

To register for the event, please click here. You can choose to attend in person or via webinar.

PanelOn Wednesday, April 9, at 6:00 Ron Jacobs will moderate a panel at the George Washington University Law School on the IRS’s proposed rules for political activity of 501(c)(4) organizations. Panelist include Cleta Mitchell of Foley & Lardner LLP, John Pomeranz of Harmon, Curran, Spielberg & Eisenberg, LLP, and Paul Ryan of the Campaign Legal Center. Each brings a different perspective to what the IRS has proposed and how it will affect political activities on the right and left. The event is free and open to the public.

Tasher Great Room, Burns Law Library, GW Law 716 20th St NW, Washington, DC 20052

moneyAs we reported in November, the California Fair Political Practices Commission reached a settlement agreement with two entities (Center to Protect Patient Rights and Americans for Responsible Leadership) involved in a 2012 ballot measure. Those entities agreed to pay a $1 million fine. The FPPC said that it would require the entities that received the contributions, California Future Fund for Free Markets (“CFF”) and the Small Business Action Committee (“SBA-PAC”) (the bottom-most entities on this chart) to disgorge the contributions they received from AFF and ARL (a total of about $15 million), even though they did nothing wrong.

The FPPC made good on its threat and recently announced that it had entered into stipulated judgments with CFF and SBA-PAC that requires those entities to disgorge the $15 million they received. CFF made an initial (and likely final) payment of $300,000 to the state, which was the amount it had left in its bank account.

Any future money those two entities raise will have to go to California. Of course, since one committee has been closed and the other said it will close, it seems like this will be the end of the matter (and would they really be able to raise any money just to pay a penalty anyway?). What is amazing is that the FPPC said the two groups that received the money did not do anything wrong, and yet they have been forced to pay the state the amount they received, even after having already spent it.

The FPPC said that it will continue to aggressively enforce the disclosure laws in California, so any groups that plan to be active in California elections will have to be very careful to comply with the necessary registration and reporting laws. And, as the disgorgement from the recipients shows, complying with disclosure laws means doing plenty of diligence on the donor groups to make certain that they have disclosed properly.

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.






In case you missed our webinar last week on government affairs compliance, you can click here for the recording and here for the presentation materials. We covered topics including:

  • Creative ways to be involved in the political process; 
  • Operating a compliant PAC;
  • Federal and state lobbying compliance;
  • Pay-to-play laws that affect business with state and local governments;
  • New efforts to force transparency on companies and nonprofits, and
  • Enforcement trends.

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.

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.

A federal court last week ruled that a small nonprofit, formed under Wyoming law to advocate positions on various political issues, may have to include certain federally-mandated disclosures on its ads and fundraising appeals, and may even have to register and report as a federal political committee.

The ruling is an important reminder that advocacy groups cannot always avoid Federal Election Commission rules merely by organizing themselves as a 501(c)(4), 527, or nonprofit established under state law.

The suit was filed by a group called “Free Speech,” which challenged the FEC’s policies for determining when fundraising appeals are subject to FEC rules and when an entity is a federal political committee, requiring it to register and file reports. The suit also challenged an FEC rule defining when an ad “expressly advocates” the election or defeat of a federal candidate, in which case the ad must contain certain disclosures and the ad’s sponsor must file an independent expenditure report. The court rejected each of Free Speech’s constitutional challenges and dismissed the suit.

Disclosures on Fundraising Appeals

The court agreed with the FEC that a federally-mandated disclosure statement must be included on a request for donations that clearly indicates the funds raised will be targeted to the election or defeat of a candidate for federal office. Before the suit, Free Speech had asked the FEC to rule on specific donation requests, but the FEC Commissioners were split over some of the requests and were unable to issue the requested Advisory Opinion. The court disagreed with Free Speech that the FEC deadlock showed that the test is unconstitutionally vague.

Disclosure and Reporting for Ads “Expressly Advocating” the Election or Defeat of Federal Candidates

The court upheld the FEC rule that draws a line between unregulated issue advocacy and express advocacy. Ads that “expressly advocate” for or against a federal candidate must contain a specified disclaimer and must be reported to the FEC through independent expenditure reports.

Free Speech argued that the concept of express advocacy should be limited to communications containing words such as “vote for,” “defeat,” or “elect.” The FEC rule, however, also treats as express advocacy a communication that “could only be interpreted by a reasonable person as containing advocacy of the election or defeat of one or more clearly identified candidates,” and that has an “unmistakable” and “unambiguous” “electoral portion.” The court concluded that this latter test is similar to (and perhaps even narrower than) the “functional equivalent of express advocacy” test, which the Supreme Court has ruled is a proper basis for federal regulation.

When is a Group Considered a Federal Political Committee? 

Finally, the court upheld the FEC’s case-by-case approach to determining when an organization must register and file reports as a federal “political committee.” Under the FEC’s approach, a group making over $1,000 in “expenditures” or raising over $1,000 in “contributions” must register and file reports as a federal political committee whenever its “major purpose” is engaging in federal campaign activity. The FEC looks at various factors in evaluating a group’s major purpose, including its public statements, fundraising solicitations, government filings, and organizational documents. Free Speech argued that this multi-factor test is too nebulous to regulate First Amendment activity and chills political speech. But the court rejected this argument, too, concluding that this loose set of factors meets constitutional muster.

Next Step for the Litigation

On May 7, the U.S. Court of Appeals for the Tenth Circuit is scheduled to hear arguments on the lower court’s earlier denial of a preliminary injunction. Free Speech has also appealed the final dismissal of the case, discussed above. The same issues are at stake in both appeals and therefore are likely to be resolved based on the May hearing. A ruling is likely to come sometime this Summer or Fall.