As it has done every two years since the Bipartisan Campaign Reform Act indexed contribution limits for inflation, the FEC has announced revised contribution limits for the 2016 election cycle. In addition to the traditional limits for candidates, PACs, and parties, the FEC also set the indexed limit for the new special accounts created at the end of 2014 for the national political parties. This first chart shows the limits for individual and PAC contributions to candidates, PACs, and state and local party committees:

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This next chart shows the amounts that an individual may give to the national party committees. The general fund is the account that has always existed, while the other funds are the new accounts Congress created in 2014 to help the parties to defray certain costs: Continue Reading More to Give: FEC Raises Contribution Limits

The Maryland legislature overhauled the state’s campaign finance law almost two years ago, but many of the key provisions did not take effect until January 1, 2015. These changes significantly affect state government contractors by introducing a new electronic registration system overseen by the State Board of Elections, and requiring electronic reporting of contributions made by the contractor, as well as by its PAC and subsidiaries, and its officers, directors, and partners.

The new law also increases the limits on contributions by individuals and business entities, and compels politically active nonprofits to register and disclose their donors. Stiff penalties may be imposed on nonprofits that knowingly and willfully fail to file registration notices or reports. Also, the State Board of Elections now has the power to issue civil citations for strict liability offenses, such as failing to keep accurate books and records.

To read the full article, please continue reading on our website.

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.

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.

As a reminder that it’s not the complicated campaign finance laws but the simple ones that will get people into trouble, a straw donor in southern California recently pleaded guilty to a number of federal charges. The charges included:

  • Writing a $120,000 check to a super PAC that he knew would be reimbursed by a foreign national;
  • Writing a number of checks to local candidates, using money from the same foreign national; and
  • Having others write checks to the same candidates using money from the foreign national.

MIXINGAlso ensnared in this case are a political consultant and a lobbyist who assisted with the scheme.

The simple lessons:

1.)    Foreign nationals may not contribute to any election – federal, state, or local – in the United States. This includes making contributions to super PACs.

2.)    Do not try to evade this rule by giving through third parties or by reimbursing contributions.

3.)    Never give a contribution using someone else’s money or that will be reimbursed by someone else.

4.)    Do not offer to reimburse someone else for a campaign contribution he or she makes, whether it is through gifts, bonuses, expense reimbursements, a raise, or in any other way.

5.)    Only give contributions from your own money, up to the applicable limits. A simple reference card for the federal limits can be found here.

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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.

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.

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.

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.