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.

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.

Frustrated with his failure to reach a deal with state legislators on campaign finance reform, New York Governor Andrew Cuomo announced last month the formation of a special commission to investigate public corruption and recommend changes in the state’s campaign finance and lobbying laws.  The 25-member Commission, each of whom has been deputized by the State Attorney General, includes 16 current or former prosecutors.

While the New York governor has broad powers to investigate state agencies, this probe is expected to reach well beyond the inner workings of government.  Governor Cuomo has announced that the Commission’s investigation will focus on government corruption and misconduct, contribution limits and third party expenditures, compliance of outside organizations and persons with existing lobbying laws, and the adequacy and enforcement of the State’s election laws.   

Unlike some blue-ribbon commissions, this is no toothless tiger.  The panel can issue subpoenas, compel testimony, and refer matters to prosecutors and police.  The Commission has already sent a letter warning two state agencies – the New York State Board of Elections, which oversees state election laws, and the New York State Joint Commission on Public Ethics, which is responsible for lobbying and ethics laws – not to destroy their records.

The Commission’s first public hearings are set for mid-September. 

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.

A final ruling on the constitutionality of the long-standing ban on contributions by federal government contractors met a significant setback last week when the D.C. Circuit remanded the case to the trial court. In an opinion issued on May 31, 2013, about two weeks after oral arguments, a three judge panel of the D.C. Circuit concluded that the case, Wagner v. Federal Election Commission, must be heard en banc by the full panel of judges of the D.C. Circuit. 

The appellate court relied on an older provision of the Federal Election Campaign Act (“FECA”), section 437h, which states that the national committee of any political party, the Federal Election Commission (“FEC”), or any voter in a Presidential election “may” file a claim that a portion of the FECA is unconstitutional in a district court, and the district court “immediately shall” certify the constitutional questions to a circuit court, which must then hear the matter en banc. Last fall, a lower federal court heard the case and upheld the contractor ban, finding that it does not violate the First and Fifth Amendment rights of government contractors and concluding in two sentences that section 437h did not require certification of the constitutional questions. 

Despite arguments from both the FEC and the plaintiffs that the three judge panel could hear the case, the court stated that section 437h is a mandatory procedure for this type of claim, based on its reading of the language, and that an en banc hearing was required. The court cited the legislative history behind the section as support for its reading, including the need to have questions about the constitutionality of FECA provisions resolved quickly by circuit courts to enable these questions to reach the Supreme Court as soon as possible.    

The court’s decision, however, will actually result in considerable delays in Wagner’s path to the Supreme Court, as it imposes a new set of procedural hurdles. The district court must first identify and certify the constitutional questions in the case, thereby sending the case back to the D.C. Circuit. Scheduling and holding additional oral arguments on the merits of the case in front of the en banc D.C. Circuit may take several weeks or even months, and the issuance of an opinion on the constitutionality of the ban could be some time after that. A possible appeal to the Supreme Court, at this point, may not be completed until after the 2014 midterm elections.

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.

 

Document1
(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.

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.



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.