Lobbying and Candidate Electioneering: Overview

NFP2011, Session 13, Thursday, June 9, 11:10-12:25PM

Speaker Biography

TERRY MILLER brings years of training and consulting experience in the nonprofit sector across a broad range of organizations. His passion is making information accessible to nonprofit managers, boards and advisors. He received his B.A. from Antioch College in Yellow Springs, Ohio in 1977, and his M.B.A. from the University of Portland in 1984. Terry balances consulting with his work as Finance Manager for River Network, a Portland, Oregon based environmental organization working to strengthen local watershed group nationally.

TERRY MILLER www.TerryMiller.biz

[email protected]

62 Rudden Ave San Francisco California 94112-2540 voice: 415-333-6320 fax: 415-333-6309

American Institute of CPAs

Session Overview

Conceptual clarity: lobbying VS. electioneering

• Activities & tax treatment by entity type

Voter Participation for public charity C3’s

: parameters both known & unknown; guidance not all precedential

Lobbying

• Public charity lobbying overview & the 501(h) election • 501(c)(4,5,6) lobbying differences: definitions, possible proxy tax

Electioneering

• What is “a 527” in reality and in press lingo? • Lobbying “Issue Ads” as a 527 activity • Why “PAC” is a meaningless descriptor without specific information • Along comes the Citizens United decision

Non-Tax Dimension: Federal LDA and State/Local equivalents (ethics laws)

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Conceptual Clarity

For Tax purposes:

Lobbying

is

working to support or oppose specific legislative proposals including ballot measures

(& some executive branch matters for (c)(4,5,6) organizations) • Allowed for all types of exempt organizations except private foundations For Tax purposes:

Electioneering

is

working to support or oppose candidates for office

(a/k/a “political campaign” activity) • Tax: IRC Section 527 = candidate electioneering • Can be more indirect than “express advocacy” • Certain “issue advocacy” grassroots lobbying messages, if targeted to influence the election of a candidate, can be 527 activities

Best for advocacy organizations: learn and master the rules; use them WORST message: “all that lobbying and political stuff is risky so don’t do very much of it” (too general)

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Activities Overview / Entity Type / Tax

Public Education Lobbying Non-partisan Voter Ed/Register 501(c)(3) Public Charities 501(c)(4,5,6) Unlimited Not substantial or 501(h) Unlimited (careful) Unlimited Unlimited; possible excise tax Unlimited Electioneering Prohibited Not primary purpose 527 Not primary purpose Not primary purpose Not primary purpose Unlimited

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Tax & Election Treatment & Reporting

Tax Reporting Donors’ Tax Treatment Donors’ Identity Election Commission Reporting 501(c)(3) Public Charities 501(c)(4,5,6) 990 Deductible Anonymous 527 990; possible 1120-POL Non deductible (Gift-taxable?) 8871; possible 8872, 990, 1120-POL Non deductible NO Gift Tax Usually Anonymous Usually Disclosed No Federal; States vary Varies Varies

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Voter Participation Activity by Charities

Parameters [Known & Unknown]

• Key precedential guidance: Rev Rul 86-95, 80-282, 78-248, 76-456, 66-256 (look at the years!) • Non-precedential guidance (more recent): CPE Article 2002, PACI Report 2004/2006, IRS Church Guide • Voter Education / Participation: Candidate Questionnaires & Forums, Voter Guides, Voting Records Broad range of issues, no editing of Q’airres - No bias or grading, watch out for timing, distribution - Even-handed treatment, broad participation (all candidates or objective criteria) - Pledges never work (indicate slant) • Registration: Entirely nonpartisan; may target historically under participating communities • GOTV: Entirely nonpartisan

“Facts & Circumstances” governs, as always in Tax Law

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Public Charity Lobbying - Overview

History

• 1930:

Seasongood

case, 1934: IRC no substantial part, 1955: IRC electioneering prohibition, 1970: IRC 501(h), 1990: final lobby regs

Lobbying is charitable (within limits) Choice of 2 tests:

• “no substantial part” (facts and circumstances) test, OR • IRC 501(h) expenditure test

Lobbying definition varies depending on test chosen 501(h) expenditure test requires “election” via Form 5768

• takes effect at beginning of year in which 5768 filed • revocation of election on same form, effective beginning of next year

Most, but not all, public charities are eligible to elect 501(h)

• (not eligible: churches & certain affiliates, government units, supporting organizations to (c)(4,5,6) organizations, 509(a)(4) testing for public safety) American Institute of CPAs 8

501(h) – To Elect or Not To Elect?

Consensus advice: Electing is always better unless budget is way >$20M, and even then get advice before revoking 501(h); why?

• 501(h) is an expenditure test with better (e.g. any) definitions about what is NOT lobbying • Four-year basis / averaging vs. single-year revocation risk • Recordkeeping complexity (direct & grassroots lobbying totals) vs. line item expense disclosure + various activity Yes/No questions • 990 Schedule C Part II-A (electing) or II-B (non-electing)

Why consider revocation over $20M?

• 501(h) has maximum allowance of $1M no matter how large, so a $100M organization could spend a mere 3% on lobbying and that’s $3M, BUT cannot be certain that % expenditures would be the primary indicator of whether lobbying is substantial (e.g. volunteer effort, impact, organizational focus may all count as well) American Institute of CPAs 9

501(c)(4,5,6) Lobbying

1/3 Two key differences from public charity rules:

1) Possibly taxable if business dues income 2) Different definitions of lobbying activity • • • • •

1) IRC 6033(e): non deductible dues or “proxy tax”

Businesses may not deduct most lobbying – IRC 162(e) No deduction for indirect lobbying via association “dues or similar amounts” (since 1965)

(IRC162(e)(3))

OBRA 1993: placed disallowance notice requirements on many (c)(4,5,6) organizations

(IRC 6033(e))

“Dues/similar amounts” does not require member voting & does include voluntary payments & assessments

(Rev Proc 98-19,

§

5.01)

Either business dues are non-deductible or the organization pays a “proxy tax” of 35% - mostly applicable to 501(c)(6) business leagues and some 501(c)(5) “horticultural” organizations (e.g. Farm Bureau) American Institute of CPAs 10

501(c)(4,5,6) Lobbying

2/3

• •

2) Definitions of (c)(4,5,6) Lobbying

Direct lobbying -

1/2

Federal and State legislation only, not city/county (!)

(IRC 162(e) & Reg. 1.162-29)

; definition essentially identical to that for 501(c)(3) organizations, but “influencing legislation” explicitly includes: planning, preparation, and coordination for a lobbying communication

(Reg. 1.162-29(b)(1)(ii))

No specific exceptions unlike electing public charities (nonpartisan analysis, technical advice, self-defense)

De minimis

exception for in-house expenditures <=$2,000 Grassroots lobbying Broader definition than for electing public charities: does not require calls to action. Test is “attempt to influence.” No exception for LOCAL

(IRC 162(e)(2)(A))

No exception for

de minimis (IRC 162(e)(5)(B)(ii))

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501(c)(4,5,6) Lobbying

3/3

•

2) Definitions of (c)(4,5,6) Lobbying 2/2

Administrative Lobbying (doesn’t exist at all for (c)(3) definition) Direct communication with “covered” executive branch officials in an attempt to influence their official actions or positions “Covered” are President, Vice President, Cabinet Officers, deputies, and certain other specified high-level employees

(IRC 162(e)(6))

State and Local exception: Federal officials only De minimis exception: in-house expenditures <= $2,000

(IRC 162(e)(5)(B)(ii))

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What is a “527” organization?

1/4 IRC 527(e)(1)&(2)

“

“

Political organization

” means a

party, committee, association, fund, or other organization (whether or not incorporated)

organized and operated

primarily

for the purpose of directly or indirectly accepting contributions or making expenditures, or both, for an “exempt function” … “

influencing or attempting to influence the selection, nomination, election or appointment of any individual to any Federal, State, or local public office or office in a political organization

, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed. … ”

You can also refer to “527 activities” of a 501(c)(4,5,6) or, though prohibited, of a 501(c)(3)

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What is a “527” organization?

2/4 Shorthand: 527’s are parties, candidate committees, PACs

• “Express advocacy” for/against Federal candidates, also comes under the Federal Election Campaign Act – FECA – election law – “Federal PAC,” (or party) and must disclose transaction details frequently (failure to do so is technically a crime) Express advocacy is sometimes referred to as seven “magic words” such as “oppose” “support” “vote for/against” and so on: explicit calls, not indirect

Tax treatment for 527s

• 527s file IRS 1120-POL and pay 35% tax on investment income if more than $100 (another organization engaging in 527 activity can owe 527(f) tax on the lesser of its investment income or 527 activity) • Donations to a 527 are not deductible but are explicitly not gift-taxable to the donor, while • Donations to a 501(c)(4) may be gift-taxable to the donor (but this has not been enforced) …so…donors wanting anonymity hired smart tax lawyers and… American Institute of CPAs 14

What is a “527” organization?

3/4

The lawyers threaded the needle and the

so called “soft PAC”

or

“527 organization” was born

to do targeted partisan Voter Participation • IRS LTRs 98-08-037, 97-25-036 flip (c)(3) electioneering prohibition around and identify activities prohibited under 501(c)(3), which are exempt function under 527, yet stop short of express advocacy - reverse facts and circumstances: Voter Education / Participation: Candidate Questionnaires, Forums, Voter Guides, Voting Records: -

Narrow

range of issues,

edited

Q’airre responses -

Bias

and

grading

,

timed & distributed

to influence election

NOT

even-handed treatment,

not necessarily

broad participation - Pledges possible • but

NO express advocacy

, so no FEC jurisdiction, and no donors were to remain anonymous since 527’s barely file American Institute of CPAs 15

What is a “527” organization?

4/4

also bringing in

“soft-PAC” Lobbying as 527 Activity

• IRS LTR 1999-25-051 describes how an organization can work entirely on / donate entirely to ballot measures but be a 527 if it chooses campaigns based on nexus to candidates - This gives donors anonymity and no risk of gift tax assessment

Leading to Public law 106-230, signed 7/1/2000 by Clinton on a fast track

• new tax forms 8871 (formation) / 8872 (transactions, resembling PAC reporting and disclosing all donors) • due from organizations not subject to FECA or State & Local equivalents

Which led in turn to the “re-birth” of the 501(c)(4) which has to be >50% non-electioneering social welfare, but offers donor anonymity

• however, this >50% constraint seemed to hold them back until Citizens United…more in a minute on this American Institute of CPAs 16

Why “PAC” is a meaningless descriptor (without more detail):

In states with ballot measures and initiatives, ballot measure committees are State PACs, but for IRS purposes are 501(c)(4) organizations

• so “PAC” without further information, at least the words “candidate PAC” does not mean anything • although there are no Federal ballot measures, so “Federal PAC” does mean a 527 organization

…by “527 organization” the MEDIA means:

•

an organization which is sufficiently political to be exempt under 527, not 501(c) (thereby escaping risk of gift tax),

•

yet stops short of express advocacy in order to escape various limitations imposed by FECA (even though the law now, and since 2000, requires donor disclosure on 8872 if FECA is eluded)

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FECA limits: independent expenditures vs. coordination

FEC has limited the amounts that individuals may contribute to Federal PACs or candidates in order to avoid the corrupting influence of single large donors

• (various subversions around political parties, convention committees and so-forth already existed of course)

…but if a person, or a PAC, absolutely does not coordinate or contribute to a candidate, then these limits are null, “independent expenditures” (based on free speech)

• coordination even means sometimes old friends no longer dine together during a campaign • (often such messages still seem remarkably well-coordinated  ) American Institute of CPAs 18

Along comes Citizens United

FECA & CREEP

• One of the roots of FECA was public criticism of bags of cash handed over to CREEP – Richard Nixon’s “Committee to Re Elect the President” by interested corporations • Building on a half-century of other law, FECA explicitly banned corporate (and union) contributions to political campaigns • Many states followed suit (many did not) • (Union Members, and Corporate Management, could still contribute to

connected

“Separate Segregated Fund” Federal PACs and the sponsoring entity could pay admin + fundraising, and/or they could, as individuals, form “non-connected” PACs)

In 2010, the Supreme Court, in Citizens United v. FEC:

• affirmed the personhood and free speech rights of corporations, and abolished the constitutionality of most FECA limits American Institute of CPAs 19

And the birth of the “I.E. Only” Federal PAC plus the re-rise of the 501(c)(4,5,6)

501(c)(4,5,6) organizations are nearly always themselves corporations or unions, which had been banned under FECA from contributing to candidates

• No longer

We now see the rise of a new breed of (c)(4)/527

• Karl Rove et al’s 2008 “Crossroads GPS” (c)(4) and “American Crossroads” (527; IE PAC) • recent press about Bill Burton et al (Obama’s team) starting “Priorities USA” (c)(4) and “Priorities USA Action” (527; IE PAC) along with SEIU and EMILY’s List’s founder; towards expected 1st >$1BILLION campaign

And the rise of the US Chamber of Commerce as a player

• business corporations can give assessments to the Chamber without being identified • the Chamber, as a corporation, can make independent expenditures, or fund an IE only PAC, in unlimited amounts (not deductible to the corporations however) American Institute of CPAs 20

What’s next?

First, who knows?

Congress experimented in 2010 with the DISCLOSE Act which would have forced Independent Expenditure campaigns to disclose the underlying donors

• Failed, and was said to be poorly drafted but may return in a fashion

IRS could aggressively pursue:

• Gift Tax on 501(c)(4,5,6) gifts • Proxy tax on business assessments used for electioneering

NYTimes, Politico.com and other sources have been paying attention, and presumably so has Common Cause and Democracy 21, but so far there’ve been no substantive calls for enforcement Could conceivably open up a challenge that electioneering within a charitable purpose is not prohibited (loss of charity “halo”)

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Non-Tax Considerations: Federal Lobbying Disclosure Act, etc.

Federal Lobbying Disclosure Act (“LDA”) of 1995; amended effective 1/1/8 by Leadership and Open Government Act of 2007

• Ethics-based: disclose money-in-government • Applies to nonprofits; registers individuals

and

organizations (was just organizations); churches exempt

“Trigger” when registration required (within 45 days):

• At least one staffer more than 20% devoted to Federal direct lobbying (in a Qtr), AND • Qtrly expenditures over $11.5K or outside lobbyist over $5K

Covers both Legislative and Executive Branch contacts

• Filing requirements: quarterly, Clerk of U.S. House and Secretary of the U.S. Senate; online, e-signature verification takes time

LDA is Federal only, but similar laws exist in some states, and even some local governments

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Federal LDA overview details

1/2 Lobbying activities include

• preparation, research & planning, • coordination with allies, • contacts made to arrange a lobbying contact, around: - Federal legislation - Federal rules, regulations, executive orders, and other executive branch positions - Nominations subject to US Senate confirmation

Certain specific exclusions from lobbying activity, including:

• Materials made available to public or mass media • Mere request for meeting or information • Testimony before a committee or subcommittee • Responding to a specific written request from a covered official • Responding to a published request for comment American Institute of CPAs 23

Federal LDA overview details

2/2 Covered officials are specified

• high-level, includes military

Associations can lead to required disclosures by members

• if they contribute more than $5,000 toward the registrant’s lobbying activities (either directly to the registrant or indirectly through the client) in a quarterly period, and • actively participate in the planning, supervision, or control of such lobbying activities

Electing Public Charities may use hybrid LDA/501(h) definitions to determine both

• trigger point expenditures, and lobbying activity costs; • all other nonprofits use the LDA only

Quarterly reporting by organizations, semi-annual reporting of [certain political] contributions by organizations and lobbyists (staff or contract) and certification that no prohibited gifts or travel were made or paid for

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Resources / Readings …l

inks to all are also at: www.TerryMiller.biz/AICPA-NFP11 1/2

“Public Policy Advocacy Bibliography & Resources: A Selection” Ver 7.0 2011 (my material & updates, based on early initial help from John Pomeranz)

Charity Voter Participation

• All cited Revenue Rulings • IRS CPE 2002 “I. Election Year Issues” Judith Kindell & Jack Reilly http://www.irs.gov/pub/irs-tege/eotopici02.pdf

Charity Lobbying

• IRS CPE 1997 “P. Lobbying Issues” Judith Kindell & Jack Reilly http://www.irs.gov/pub/irs-tege/eotopicp97.pdf

• “Public Charity Lobbying” – overview + advanced strategies (my material)

501(c)(4,5,6) Lobbying

• IRS CPE 2003 “L. Political Campaign & Lobbying Activities of IRC 501(c)(4), (c)(5), and (c)(6) Organizations,” Jack Reilly & Barbara Braig Allen • AICPA NFP09 “Lobbying by all types of Exempt Organizations” (my material)

527 Organizations

• Rev Rul 2003-49 • IRS CPE 2002 “I. Election Year Issues” Judith Kindell & Jack Reilly http://www.irs.gov/pub/irs-tege/eotopici02.pdf

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Resources / Readings

2/2 Citizens United

• Political Tax Law After Citizens United: A Time for Reform, Gregory L. Colvin, Adler & Colvin (you can find it on YouTube and in print) • Search on Citizens United, particularly in NYTimes

Lobbying Disclosure Act

• Search on it • Alliance for Justice did a Webinar I attended and saved but don’t have copyright to ( www.afj.org

) American Institute of CPAs 26