Advocacy groups that have a public policy beef with any politician need to be careful about what they write and about whom. Naming names can result in taxes under recently clarified Internal Revenue Service law and possibly fines or other adverse consequences under proposed Federal Election Commission rules.
IRS Revenue Ruling 2004-06 articulates certain factors that will result in taxes on nonprofit copy that includes the names of candidates in conjunction with other content. Arguably, Rev. Rul. 2004-06 is not new law, but is the IRS’ attempt to clarify what it deems to be inappropriate political copy and activity for three types of tax-exempt groups: 501(c)(4)s (social welfare groups), 501(c)(5)s (labor unions) and 501(c)(6)s (business leagues).
More troubling, however, are rules proposed by the FEC that would change the definition of “political committee” such that many advocacy organizations would be subject retroactively to the FEC’s donor contribution limitations, expenditure limitations and reporting requirements. Direct mail and Internet copy addressing public policy issues ranging from the war in Iraq to finding homes for puppies could, under these proposed rules, subject groups and their donors to a torrent of the FEC’s complex and limiting regulations.
Writing good direct marketing copy for issue advocacy is difficult enough. Nonprofit direct mail copy may be designed to inform, persuade, motivate and result in some action such as signing petitions or surveys and perhaps making voluntary contributions.
By its nature, effective direct mail copy — in the commercial, ideological, nonprofit and religious arenas alike — is designed to influence decisions or behavior. Politicians, however, have a vested interest in controlling who influences the electorate and how.
Advocacy or influencing elections? Nonprofit advocacy groups are subject to what many already believe to be too much regulation, especially considering that their copy should be protected by the First Amendment. Tax-exempt organizations under Internal Revenue Code section 501(a) also are subject to certain IRS restrictions on what they can and cannot do if they are to maintain their tax-exempt status.
Straying too far from one’s tax-exempt purposes in either direct mail copy or the activities of the organization can result in assessment of taxes or even loss of tax-exempt status in the most egregious cases.
IRC section 527, on the other hand, provides tax-exempt status for the express purpose of influencing elections. Candidate committees, political parties and political action committees are tax-exempt under section 527. This is where the confluence between the complex IRS regulations and FEC law can be maddening for direct mailers involved in issue advocacy.
Direct mail and Internet copy designed to influence public policy inherently must try to influence politicians since they are the ones who write the laws, oversee appointment of federal judges and supposedly are elected to effect the public policies of the people.
The IRS and FEC seem to believe that there must be a clear delineation between influencing public policy and influencing elections. But those very policies emanate from elected officials themselves who would prefer that groups outside their control don’t criticize them.
Recent IRS ruling. IRS Rev. Rul. 2004-06, issued in January, sets forth six factors that try to delineate what communications are designed to influence elections versus public policy. A tax may be imposed on nonprofits if their copy:
· Identifies a candidate.
· Coincides with an election campaign.
· Targets voters in a particular election.
· Identifies the candidate’s position on the public policy issue.
· Distinguishes that candidate’s position from another’s, even if apparently done in prior or subsequent copy.
· Is not part of an “ongoing series of substantially similar” communications.
Rev. Rul. 2004-06 lists five other factors that would exclude such copy from the tax, including if the copy identifies specific legislation that the mailing organization wishes to influence.
For example, a 501(c)(4) organization in Delaware advocates for pet adoption, and is in the congressional district of 30-year incumbent Jane Smith. Smith not only has refused to introduce any pet legislation, but has advocated chemical testing on animals. Audrey Jones is running against Smith, and has generally supported pet adoption.
The organization issues a grassroots fundraising letter throughout Delaware and neighboring states in an election year. The letter discusses many things about pet adoption, and to highlight certain public policy issues, the letter discusses differences between comments made by Smith and Jones. Under IRS 2004-06, the expenditure for that letter could be subject to a tax.
Proposed FEC rule. A potentially more drastic and troubling change looms under the FEC’s March 11 proposed rulemaking on the definition of “political committee.” 69 Federal Register 48, at 11736 (2004). Oddly enough numbered Notice 2004-6, the proposed rule could subject nonprofit issue-advocacy groups to the FEC’s requirements applicable to committees that are created specifically to influence federal elections.
The proposed rule drew some attention mostly because it was seen as an attempt by Republicans to restrict funding of liberal IRC section 527 organizations by billionaire financier George Soros and others. Some 527 organizations that weren’t directly associated with any candidate or political party were in somewhat of a regulatory “no-man’s land.” They were not specifically regulated by the FEC, and escaped restrictions placed on “soft money” under the Bipartisan Campaign Reform Act (“BCRA,” otherwise known as “McCain-Feingold”).
The proposed FEC rule, however, would not be limited to section 527 organizations. Its reach would extend to any “committee, club, association or other group of persons,” which would clearly include “non-political” nonprofits.
The U.S. Supreme Court in a 5-4 decision upheld McCain-Feingold in the case McConnell v. FEC, 540 U.S. (2003). Multiple parties sued challenging the constitutionality of that law. The majority opinion in McConnell may have all but eviscerated the line between issue advocacy not subject to FEC regulation and political committee activities expressly designed to influence elections that were under FEC jurisdiction.
Copy that promotes, supports, attacks or opposes “clearly identified” federal candidates was a focus of the decision. The term “clearly identified” under the FEC’s regulations includes naming a candidate or the office, showing his or her picture or even including a caricature drawing (which clearly takes some fun out of issue advocacy).
Before saying “who cares,” nonprofits not familiar with FEC rules should know a little about the FEC’s complex and strict contribution, expenditure and reporting requirements. The rules are much more involved and cumbersome than this space permits to explain, but FEC regulation of political committees kicks in when a committee receives or spends $1,000 in a year. So just one mailing for many organizations would surpass that threshold.
Donor contributions are capped at $2,000 per person per election for political candidate committees and $5,000 per year to political action committees. Individual donors of $200 or more must supply their name, employer and occupation, which get reported to the FEC for public records. Thus, the anonymity of donors to controversial or unpopular advocacy groups currently protected under NAACP v. Alabama, 357 U.S. 449 (1958) would be lost in many cases.
Relying heavily on the majority opinion in McConnell, the proposed FEC regulations would boldly and controversially change the definition of “political committee” in a way that would subject many nonprofit issue-advocacy groups to FEC jurisdiction. Remembering from above that tax-exempt organizations are limited in what they may say or do and still maintain their tax-exempt status, most nonprofits may nevertheless engage in a level of “political” debate.
The FEC reads McConnell and even previous Supreme Court and other federal court decisions as giving the commission room to regulate more speech, even though some of those decisions actually struck down prior FEC attempts to regulate issue advocacy. The Supreme Court has said that a political committee could be defined to include organizations where the major purpose is to influence elections.
In one of those nuances that have an enormous effect, the FEC would change the law to regulate any organization where a major purpose is to influence elections. Tax-exempt and other organizations created and operating in principal purpose for non-political reasons still could be deemed to be political committees subject to the FEC’s very restrictive rules.
The FEC proposes that not only would it change whom it regulates, but it proposes a four-year look-back provision such that any organization that met the new rule in the past four years would be subject to the limitations now. Nonprofit organizations subject to the new rules would have to:
· Restructure how they spent their money so as not to run afoul of the FEC expenditure restrictions.
· Seek permission from their donors to convert those donations to FEC contributions.
· Report the employer and occupation of all $200-plus donors.
Failure to comply could result in fines and/or other penalties.
More than 100,000 written comments, including those by the Free Speech Coalition of McLean, VA, were submitted to the FEC by the close of the public comment period. That may be the toll exacted on the FEC’s chutzpah for taking on grassroots advocacy groups, especially in the Internet age.
And even if the proposed rule were to survive that onslaught and become a final regulation, the Constitution forbids ex post facto laws, and the rule might exceed the FEC’s legal authority because this, in essence, is making new law beyond the bounds of the controlling statute.
Seven days after the FEC issued its proposal, The Washington Post reported a survey by Democratic pollster Peter Hart saying, “Americans feel disconnected from government and ignored by the political process … with nearly half the electorate saying they have no impact on what the government does.”
That’s not news to grassroots issue-advocacy copy writers and organizations, whose very purpose is to involve citizens in public policy. Those in government whom they need to influence the most unfortunately want control of the spigot of speech, press and petition rights — as well as the money.
After years of getting overruled by courts in the issue-advocacy area, the FEC may believe that it has momentum and the support of Congress and the Supreme Court in regulating issue-advocacy copy. In any event, rest assured that this is not the end of worries about the FEC for issue-advocacy copy writers.
