Presentation Transcript

1. Electioneering in a Post-Citizens United World

   James P. Joseph May 18, 2011 This summary is intended to be a general summary of the law and does not constitute legal advice. You should consult with competent counsel to determine applicable legal requirements in a specific fact situation. 52653118.3
2. Overview Focus on nonprofits, so presentation will review the different types of organizations that can be used as vehicles to influence elections. 501(c)(3)s, (c)(4)s, (c)(6)s, 527s and PACs. What they can and cannot do in the political arena. Reporting obligations. Fund-raising limitations, especially contribution limits. Overlay -- what is the role of corporations?
3. Citizens United v. FEC130 S.Ct. 876 (Jan. 21, 2010 What did it say: The Supreme Court ruled that a corporation can make an independent expenditure expressing its support for or opposition to a federal candidate. What it did not say: It did not say that a corporation can make contributions to federal candidates or coordinate public statements of support. What will be the effect: The end of democracy as we know it? A fuller expression of First Amendment rights in our political process?
4. Section 501(c)(3) organizations Charitable and educational organizations. Contributions to a c3 are tax deductible. Contributions to a c3 are not subject to gift tax. Can engage in limited lobbying, but absolutely no electioneering (no “support for, or opposition to, a candidate for public office”).
5. Section 501(c)(3) organizations (cont’d) Must file and make public Form 1023 (exemption application) and annual Form 990 (but can withhold names of donors). Depending on extent and type of lobbying, may need to file Lobbying Disclosure Act registrations and disclosures, which are public, but do not disclose donors. May make “electioneering communications” (broadcast ads featuring a federal candidate and run within 30 days of a primary or convention or 60 days of a general election). Electioneering communications by a c3 cannot support or oppose a candidate for office. Must be disclosed to FEC and list earmarked gifts that supported the broadcast ad. May receive donations from anyone (individuals, corporations, unions, federal government contractors or foreign nationals).
6. Section 501(c)(4) organizations Social welfare organizations. Citizens United is a c4. Contributions to a c4 are not deductible as charitable contributions. Contributions may be deductible under 162 as business expenses, but not if earmarked or possibly if used for lobbying or electioneering activities.
7. Section 501(c)(4) organizations (cont’d) Technically, a gift tax may be imposed on gifts from individuals of more than $13,000 per year. (Contributions from corporations are not subject to gift tax.) Gift tax in this area has not generally been enforced by the IRS. Recent reports, including front page NYT article last Friday (May 13), that the IRS has asked 4-6 taxpayers about gifts to c4s. A donor may be able to avoid gift tax by claiming there is a direct financial/business benefit to c4 contribution. If the IRS expands these inquiries, we should expect constitutional challenges -- limits on free speech, freedom of association perhaps.
8. Section 501(c)(4) organizations (cont’d) May accept unlimited contributions from anyone (individuals, corporations, unions, federal government contractors, or foreign nationals). May engage in unlimited lobbying. If lobbying activities include broadcast ads close to an election (30 days before primary or convention, 60 days before general) and refers to or identifies a Federal candidate, must disclose to the FEC as an “electioneering communication” (Form 9). May engage in political or electioneering activities (“support for, or opposition to, any candidate for public office”), but electioneering cannot be the primary activity in any fiscal year. Unclear, but “primary” generally considered to be 51% or more of activities.
9. Section 501(c)(4) organizations (cont’d) A c4 is not required to, but may file an exemption application (Form 1024); and must file an annual return (Form 990). Form 1024 (if filed and approved) and Form 990s are public, but names of donors may be withheld. If the c4 does not have electioneering as a primary activity, it does not need to register as a 527 with the IRS (Form 8871) or file periodic public reports with the IRS (Form 8872). If any engages in any more than deminimis electioneering, must file Form 1120-POL, which is not public, and pay tax on the lesser of net investment income or electioneering expenditures. Tax rate is highest corporate rate.
10. Section 501(c)(4) organizations (cont’d) Under the FEC rules, the c4 has to register as a PAC only if it: receives contributions in excess of $1,000 in a calendar year, and makes “expenditures” in excess of $1,000 a year (with “expenditures” being defined as “any purchase, payment, distribution, loan, advance, deposit, or gift of money or anything of value, made by any person for the purpose of influencing any election for Federal office”). The Supreme Court in Buckley v. Valeo limited the definition of a PAC to organizations controlled by a Federal candidate or whose “major purpose” is the nomination or election of a Federal candidate (unclear what “major purpose” is and how it may differ from “primary purpose” under the tax laws).
11. Section 501(c)(4) organizations (cont’d) Within these limits (not “primary” or “major” purpose), c4 may make independent expenditures in support of or in opposition to a federal candidate (express advocacy or functional equivalent not coordinated with candidate or party). Must file FEC Form 5 disclosing expenditure and, if c4 raised money for that particular expenditure, disclose donors. May not make contributions to a federal candidate or political party or make expenditures coordinated with a federal candidate or political party. Can make contributions to a state or local candidate, if allowed by applicable election laws.
12. Section 501(c)(6) organizations Trade associations/business leagues. Must be organized to support a “line of business.” Contributions to a c6 are not deductible as charitable contributions. Contributions are generally deductible under 162 as business expenses, but not to the extent contributions are used for lobbying or electioneering activities. Because most c6 contributions related to a business activity or are made by corporations (which are not subject to gift tax), gift tax does not generally apply.
13. Section 501(c)(6) organizations (cont’d) A c6 is not required to, but may file an exemption application (Form 1024); and must file an annual return (Form 990). Unlike c3s and c4s, exemption application (if filed) and Form 990s are not public. c6 not required to disclose the names of its donors/members. Like a (c)(4) organization, a (c)(6) will not have to register as a 527 unless its “primary” activity is electioneering (under the IRS definition) and as a PAC unless its “major purpose” is electioneering (under the FEC definition). If any engages in any more than deminimis electioneering, must file Form 1120-POL, which is not public, and pay tax on the lesser of net investment income or electioneering expenditures. Tax rate is highest corporate rate.
14. Section 501(c)(6) organizations (cont’d) May accept unlimited contributions from anyone (individuals, corporations, unions, federal government contractors, or foreign nationals). May engage in unlimited lobbying relating to its line of business. If lobbying activities include broadcast ads close to an election (30 days before primary or convention, 60 days before general) and refers to or identifies a Federal candidate, must disclose to the FEC as an “electioneering communication” (Form 9). May engage in political or electioneering activities relating to its line of business (“support for, or opposition to, any candidate for public office”), but electioneering cannot be the primary activity in any fiscal year. Unclear, but “primary” generally considered to be 51% or more of activities.
15. Section 501(c)(6) organizations (cont’d) Within limits (not “primary” activity or “major purpose”), c6 may make independent expenditures in support of or in opposition to a federal candidate (express advocacy or functional equivalent not coordinated with candidate or party). Must file FEC Form 5 disclosing expenditure and, if c6 raised money for that particular expenditure, disclose donors. May not make contributions to a federal candidate or political party or make expenditures coordinated with a federal candidate or political party. Can make contributions to a state or local candidate, if allowed by applicable election laws.
16. “527s” Under Internal Revenue Code, all political organizations are tax exempt under section 527,including political parties, candidate committees, PACs and non-PACs that primarily influence elections. Using the common parlance, a 527 organization is one that is “organized and operated primarily for … 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.” (section 527(e)(1), (2)). But, is not registered as a PAC for FEC purposes.
17. “527s” (cont’d) A 527 must file a Form 8871 with the IRS within 24 hours of formation. It must file Form 8872 periodically (semi-annually in non-election years, during election years, quarterly, plus pre- and post-election reports), disclosing donors’ names, addresses and contribution amounts and dates. Forms 8871 and 8872 are public documents.
18. “527s” (cont’d) Must file Forms 1120-POL and 990 on an annual basis. 990 is public (but can withhold names of donors). 1120-POL is not public. If a 527 does not make any contributions to candidates or political parties or expenditures under FEC rules (express advocacy or functional equivalent), then the 527 can avoid registering as a PAC with the FEC. May accept unlimited contributions from individuals, corporations, unions, federal government contractors, or foreign nationals. Contributions not tax deductible (§ 162(e)).
19. Connected PAC Formed by a corporation or other entity. The parent is permitted to pay overhead and fundraising expenses of PAC. Must register with the FEC and make periodic public filings disclosing contributions (including donors’ information) and expenditures. Maximum contribution of $5,000 per year. May only solicit funds from its “restricted class” (shareholders, senior staff). No contributions from corporations, unions, federal government contractors or foreign nationals.
20. Connected PAC (cont’d) May make contributions to candidates or political parties or expenditures coordinated with candidates or political parties in limited dollar amounts. May make unlimited independent expenditures (“vote for/vote against”) or other support or opposition for a candidate that are not coordinated with a candidate or political party. Must file a Form 1120-POL,which is not a public document. No Form 990 required. Contributions not tax deductible (§ 162(e)).
21. Nonconnected PACs Must register with FEC, and file periodic public statements disclosing contributions (including donor information) and expenditures. Pays its own administrative and overhead expenses. Contributions limited to $5,000 per year. Nocontributions from unions, corporations, federal government contractors or foreign nationals. May make contributions to candidates or coordinated expenditures in a limited amount. May make unlimited independent expenditures. Contributions not tax deductible (§ 162(e)).
22. Independent Expenditure PACs (aka “Super PACs”) Possible only in the aftermath of the Supreme Court’s holding in Citizens United (which allowed corporations and unions to engage in express advocacy as long as the communications are not coordinated with a candidate or political party) and the ruling by the U.S. Court of Appeals in DC in SpeechNow (which held contribution limits unconstitutional as applied to contributions to a PAC that makes only independent expenditures). Must register with the FEC and file periodic public statements disclosing contributions (including donor information) and expenditures. Pays its own expenses.
23. Independent Expenditure PACs(aka “Super PACs”) (cont’d) Can accept unlimited contributions from corporations, unions and individuals, but still not foreign nationals. Can spend unlimited amounts on independent expenditures (express advocacy or functional equivalent, not coordinated with candidate or party). Cannot make contributions to candidates or political parties. Cannot coordinate with candidate or political party. Contributions not tax deductible (§ 162(e)).
24. Federal Contribution Limits 2011-2012
25. Federal Contribution Limits 2011-2012 1. Spouses have separate contribution limits. However, if a contribution is made on a joint account where only one spouse signs the check, the contributed amount will be allocated in full to the signer. If the spouses intend that the check be allocated between the two of them, each spouse must sign the check or accompany the contribution with written instructions (a letter, note or donor card). If both spouses sign the check or other writing but do not specify how their contribution should be allocated, the contributed amount will be allocated equally between them. 2. The limit on contributions to federal candidates or candidate committees is a per-election limit. For purposes of contribution limits, primary, general, special, and run-off elections are each considered separate elections. To avoid inadvertently making an excessive contribution, contributors should specify in an accompanying letter, note, or donor card the election for which the contribution is intended. 3. The limits in this column apply to contributions to the federal accounts of state and local party committees. Also, the limit is shared by all state and local party committees for a particular party in a single state. When making a contribution to a state or local party committee, it is important to determine in advance, and specify through written instructions to the recipient committee, whether the contribution is intended for the party’s federal or non-federal account. Different limits may apply to contributions to non-federal accounts. 4. The biennial limit applies to total individual contributions made between January 1, 2011 and December 31, 2012.
26. FEC Guidance – or Lack Thereof In January 2011, FEC deadlocked along party lines (3-3) on whether to propose new rules to comply with Citizens United decision. Both Democratic and Republican drafts eliminate regulations that prohibit the use of corporate and labor organization general treasury funds to finance independent expenditures and electioneering communications. The Democratic draft also included new, comprehensive disclosure rules relating to independent expenditures and electioneering communications.
27. Disclose Shortly after the Citizens United decision, lawmakers and others began floating the idea of limiting the impact of the decision by tailoring new requirements specific to government contractors. In 2010, President Obama supported, and the House of Representatives passed the Democracy Is Strengthened by Casting Light On Spending in Elections Act (“DISCLOSE Act”), which would have required extensive public reporting by companies making political expenditures. However, the bill failed to pass the Senate.
28. Draft Executive Order Suggests Possible New Federal “Pay-to-Play” Requirements for Government Contractors A widely circulated draft Executive Order dated April 13, 2011 suggests that President Obama intends to require for the first time that all federal government contractors disclose information about their direct and indirect political expenditures. The draft Order, if issued and if implementing regulations are adopted, would impose significant new requirements on contractors. However, based upon the controversy generated by the draft Order thus far, the implementation of the proposed disclosure requirements could be delayed—or completely blocked—by substantial opposition or litigation. The White House has confirmed the existence of the draft Order, but has suggested that, even if issued, the final text may differ from the draft.
29. Executive Order Provisions The disclosure requirements would apply to “all entities submitting offers for federal contracts.” Covered entities must disclose political contributions made within the two years preceding the offer. The disclosures must include: all contributions or expenditures to (or on behalf of) federal candidates, parties, or party committees made by the bidding entity, as well as contributions or expenditures made by directors or officers of the entity, and any affiliates or subsidiaries within the entity’s control; and all contributions made to third parties with the intention or reasonable expectation that the recipient would use those contributions to make independent expenditures or electioneering communications.
30. Executive Order Provisions (cont’d) A safe harbor would be provided for contributions that do not total more than US$5,000 in a year to a given recipient, in the aggregate among the entity, officers, directors, affiliates, and subsidiaries. The government will make all data from these disclosures publicly available in a centralized, searchable, downloadable, and machine-readable format.
31. Executive Order: Unresolved Issues There are a number of issues that will need to be resolved either in later drafts of the Executive Order or by the FAR Council regulations. For instance, key terms will need to be defined, including “entity,” “affiliates,” subsidiaries,” and “control.” Among the many issues left open by the draft are the following: How will the notice affect contributions to nonprofit organizations? Will contributions to nonprofit organizations, such as trade organizations and section 501(c)(4) organizations, be covered if the nonprofit organizations make independent expenditures or electioneering communications? Will contributions to charitable organizations that engage in grassroots lobbying, which can be classified as electioneering communications, be covered as well? Will regulations clarify a contractor’s “intention or reasonable expectation” with respect to how the use of contributions to third-party entities will be determined?
32. Executive Order: Unresolved Issues (cont’d) Will contributions by partnerships be covered? Will both competitively bid and sole source contracts be covered? Will there be a threshold value of contracts that a contractor must meet before being required to certify and disclose contributions? Will there be a specific start date (perhaps the date of the issuance of the Executive Order) after which companies will need to disclose contributions and expenditures going forward? Or will there be a “look back” requirement to disclose contributions made prior to the effective date of the regulations? Will the disclosure/certification be subject to amendment during the course of contract performance?
33. Pending FEC Litigation Congressman Chris Van Hollen filed a lawsuit on April 21, 2011 challenging FEC disclosure regulations relating to “electioneering communications” (broadcast ads mentioning a candidate close to an election) The “McCain-Feingold” Bipartisan Campaign Finance Act of 2001 requires the disclosure of the identity and contribution amounts of donors who fund electioneering communications.
34. Pending FEC Litigation/Actions The FEC, in its regulation implementing the law, requires disclosure of donors only when the donation “was made for the purpose of furthering electioneering communications” by the spender. This a restriction on contribution disclosure that is not in the statute. Van Hollen asserts that Congress did not include a “state of mind” or “purpose” condition tied to “furthering” electioneering communications in the relevant McCain-Feingold disclosure provision. According to Van Hollen, the FEC, by adding this requirement in its regulations, has contravened the plain language and meaning of the statute and gutted the contribution disclosure requirements for “electioneering communications.” Congressman Van Hollen also filed a petition with the FEC asking it to conduct a rulemaking proceeding to adopt new regulations requiring organizations that make “independent expenditures” to disclose the identity of their donors.