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30011 Ivy Glenn Drive, Ste. 223; Laguna Niguel, CA 926771-877-449-2700 | www.WewerLacy.com | [email protected]

Election Law in California

Prepared by Wewer & Lacy, LLP

www.WewerLacy.com

Copyright © 2008, Wewer & Lacy, LLP; all rights reserved.

Tax Exempt OrganizationsAnd Political Activity

April 16, 2008

Santa Monica, CA


Reprinted with permission


POLITICAL ACTIVITIES


POLITICAL ACTIVITIESThe Internal Revenue Code and Regulations, (and most tax exempt organization’s own Articles of Incorporation per state law requirements), restrict 501(c) organizations from intervening directly, or indirectly, in any political election campaign in support or opposition to a candidate.


Types of tax exempt organizationswe will discuss today

• Charities, known as “501(c)(3)” organizations;

• Social welfare, advocacy organizations, known as “501(c)(4)” organizations;

• Unions, known as “501(c)(5)” organizations;

• Trade associations, known as “501(c)(6)” organizations.


Common Tax Law Restrictions on Activities of Exempt Organizations. Source: IRS

501(c)(3) 501(c)(4) 501(c)(5) 501(c)(6) 527

Receive tax deductible

charitable donations Yes No No No No

Receive business-

deductible fees/dues Yes Yes Yes Yes No

Legislative Advocacy Limited Yes Yes Yes Limited

Engage in candidate

election activity No Ltd. Ltd. Ltd. Yes

Engage in advocacy

not related to legislation

or candidate elections Yes Yes Yes Yes Ltd.

Inv. Income taxable? No No No No Yes


501(c)(4), (5), and (6) groups may publicly advocate positions on public policy issues

• They may educate the public on their issues;

• They may lobby for legislation.

• But, when their discussion of issues involves positions of public officials who are also candidates, the communication is regulated and may be subject to penalty tax under IRC Section 527(f).


-A charity is “absolutely prohibited”from candidate-related activity,-Treas. Reg.1.501(c)(4) establishes that “social welfare” does not include participation in a political campaign.-A tax exempt group either on its own or by its agents will be penalized for engaging in political campaigns on behalf of or opposition to candidates for public or party office. -A payment to a political party or campaign is definitionally considered an election related expenditure under IRC Sec. 527.-Penalties include taxes on expenditures under Section 527(f) and possible revocation of tax-exempt status for excess political activities.

RED LIGHT activities:


Revenue Ruling 2004-6• This IRS guidance sheds light on the service’s view on when a

communication by a (c)(4), (5), or (6) is subject to penalty tax and potential revocation liability for candidate intervention.

• Generally, the IRS applies a “facts and circumstances” test and looks to whether the communication:– Identifies a candidate;– Is timed to an election campaign;– Targets voters in a particular election;– Identifies a position on a public policy issue;– The position of the candidate distinguishes the candidate from

others in the race;– The communication is not part of an on-going series of

substantially similar advocacy communications on the same issue.


A tax exempt 501(c)(3)charity may never engage

in candidate-related activity.


HOWEVERA charity may engage in limited lobbying activity using “tax deductible” dollars. Support or opposition to a ballot measure is considered lobbying. Where a 501(c)(3) has taken the 501(h) election by filing IRS Form 5768, it may spend up to 20% of its expenditures to no more than $1 million in support or opposition to a ballot initiative, the purpose of which goes to its core mission.

In 1998, Proposition 10, a statewide ballot measure devised by Rob Reiner, that added a tobacco surtax to fund “early childhood development,” passed by a vote of 50.5 % to 49.5%. Financial contributors to the campaign to pass Proposition 10 included the following charities:

American Cancer Society - $544,330American Heart Association - $50,000National Center for Tobacco Free Kids - $100,000


ANDA social welfare organization or

chamber of commerce may make political expenditures for or against

candidates from a “separate segregated fund” (“SSF”) established

under IRC Section 527(f)(3).

An SSF’s activity will trigger potential disclosure and periodic reporting

requirements with the IRS, FEC, and/or state authorities.


What is a SSF?• A fund managed by an IRC 501(c)

organization with separate record keeping;• That is a “separate segregated fund” within

the meaning of the Federal Election Campaign Act or a similar state statute;

• Whose expenditures are entirely forpolitical campaign purposes. It is basically a checking account. Treas. Reg. 1.527-2(b)(1).


ELECTION YEAR ISSUES


ELECTION YEAR ISSUES501(c)(3) Charities

• A charity is absolutely prohibited from engaging in political campaign activities, meaning:– It may not “participate in, or intervene in (including

the publishing or distributing of statements) any political campaign on behalf of (or opposition to) any candidate for political office.” IRC 501(c)(3).

– Rating of candidates, even on a nonpartisan basis, is prohibited. Assn. of Bar of NYC v. Commissioner, 858 F.2d 876 (2d Cir. 1988).


• Nothing in Section 501(c)(3) (4) or (6) prevents a nonprofit from purchasing media time for a discussion of issues in furtherance of its exempt purpose, whether or not during an election. But content and timing matters! McCain-Feingold!!!

• The fact that candidates have aligned themselves on one side or the other of a charity’s issue should not impact a charity’s ability to reach the public with a pure issue message. 1995 ABA Tax Section Comment.

• The Federal Election Commission regulates such communications when they occur 60 days before a general election, 30 days before a primary election, mention a federal candidate’s name, and are broadcast, or on cable or satellite communications. This rule is part of the so-called “McCain-Feingold” reforms. 11 CFR 100.29.

– However, the U.S. Supreme Court found this rule tobe unconstitutional as applied to Wisconsin Right to Life, a nonprofitsocial welfare organization.


Can activities that are “educational” also result in political campaign intervention? Yes!

• An activity is not “educational” if it is mere presentation of unsupported opinion. IRS Rev. Pro. 86-43, 1986-2 C.B. 729. Factors showing a communication is not “educational” include:– Presentation of viewpoints unsupported by facts;– Distorted facts;– Substantial use of inflammatory and disparaging terms and

conclusions;– Approach is not aimed at developing audience’s

understanding.


Key factors in determining whether acharity’s communications

are political intervention under IRS rules:

• Motivation to accomplish exempt purpose is no excuse. Even an activity that was managed in a nonpartisan fashion and in the public interest, to elicit and publish the views of elected officials on an issue, or rate them on their experience, can be illegal campaign intervention. Rev. Rulings. 76-456, 67-71. A “not qualified” rating is still an intervention even if it was derived in a nonpartisan manner. Assn. of Bar of NYC case, supra.


ELECTION YEAR ISSUES• A nonprofit’s communications must

avoid “words of express advocacy” for or against a candidate.– The FEC may regulate “funds used for communications that

expressly advocate the election or defeat of a clearly identified candidate.” Buckley v. Valeo, 424 U.S. 1, 77 (1976). “Support, oppose, elect, defeat, vote for or against.”

– The FEC and McCain-Feingold have since expanded the definition to include words, when “taken as a whole…could only be interpreted as electoral advocacy.” 11 CFR 100.22

– Wisconsin Right to Life also expands the definition to include words relating to “fitness for office.”


Candidates• Nonprofits must avoid ties to candidates,

parties and PACs.• Even “indirect” intervention in a campaign can

imply improper collusion with a candidate, party, or PAC, For example:– Coordinating the content, timing, or distribution of

materials;– Joint fundraising mailings or advertising events;– Distribution of materials of the candidate, party or

PAC, or vice versa, is considered improper. Treas. Reg. 56-4911-2(b)(2)(v).


“Candidate-Controlled”

• The IRS considers an organization to be “candidate-controlled” under IRC 4955(d)(2), and will assess a penalty tax or revocation, where a candidate (elected official) has a continuing, substantial involvement in the day-to-day operations or management of the organization. Expenditures that can be considered political expenditures under this statute include:– Amounts paid to the candidate for speeches or other services;– Travel expenses;– Expenses for polls surveys, or other studies prepared for the

candidate;– Advertising, publicity or fundraising for the candidate;– Any other expense the primary purpose of which is to promote

public recognition of the candidate.


• Can directors, management and staff of a nonprofit organization serve on a PAC?

– Yes. The FEC determined in Advisory Opinion 1984-12 (May 31, 1984) that directors of a charity, acting in individual capacities, could establish a non-connected PAC.

– But a 501(c)(3) charity may never manage a PAC.• And note acts of others in support of candidates can be attributed to a

nonprofit.– While the prohibition on electioneering does not prevent an

organization’s officials from being involved in a campaign or PAC in their private capacity, the principles of agency will be applied by the IRS where the authorized actions of employees or members of an organization cross the political line. IRS General Counsel Memo 34631.

Campaign activities of managersand staff


Voter Guides• A charity may annually prepare a compilation of voting records of all

Members of Congress on major legislation affecting its exempt purpose and make it generally available to the public, where there is no editorial opinion and its contents and structure do not indicate approval or disapproval of any members or their voting records. Rev. Rul. 78-248, 1978-1 C.B. 154, Situation 1.

• On the other hand, a charity that distributes such a compilation widely among the electorate during an election campaign did violate the prohibition on electioneering, even without express statements of support or opposition for candidates, because the timing of the distribution indicated it was not nonpartisan. Rev. Rul. 78-248, 1978-1 C.B. 154, Situation 4.

• But Rev. Ruling 80-282, 1980-2 C.B. 178 also holds that an organization may indicate its position in a voter guide, and whether each legislator voted in accordance with its position, as long as there is no mention of candidates or elections, and distribution is nonpartisan.


Candidate Questionnaires

• Candidate voter guides may be distributed during an election and qualify as educational under limited circumstances if they are truly nonpartisan.

• Facts and circumstances which establish a “voter guide” is nonpartisan include:

– Whether the questionnaire was sent to all candidates;– Whether all responses are published;– Whether the questions cover a wide variety of issues;– Whether the questions indicate a bias towards the organization’s preferred

answer;– Whether the responses are compared to the organization’s positions on the

issues; and– Whether the responses are published as received without editing by the

organization. Rev. Rul. 78-248, supra, Situation 2 and 3.


Candidate Forums• A 501(c)(3) charity may hold a debate during the primary season that is

limited to the candidates for nomination of one political party. Fulani v. League of Women Voters, 882 F.2d 621 (2d Cir. 1989).

• Rev. Ruling 86-95, 1986-2 C.B. 73 describes public forums involving Congressional candidates sponsored by a charity. It holds that the conduct of these forums does not constitute participation or intervention in a political campaign under the following facts and circumstances:

– All legally qualified candidates were invited;– The questions were prepared and presented by an independent nonpartisan

panel;– The topics discussed covered a broad range of issues of interest to the

public;– Each candidate had an equal opportunity to present his or her views on the

issues discussed; and– The moderator did not comment on the questions or otherwise make

comments that implied approval or disapproval of any of the candidates.


• The Federal Election Commission allows charities to stage nonpartisan candidate debates, the structure of which is left to the organization, provided the debates include at least two candidates and are nonpartisan in that they do not promote or advance one candidate over the other. 11 CFR 110.13.

• In determining whether a debate that does not include all legally qualified candidates is political intervention, both the FEC and IRS look to:

– Whether inviting all legally qualified candidates is impractical;– Whether the organization adopted reasonable, objective criteria in

determining which candidates to invite;– Whether the criteria was applied consistently and non-arbitrarily;– Whether other factors, such as in Rev. Rul. 86-95, indicate the debate was

conducted in a neutral, nonpartisan manner. TAM 96-35-003 (Apr. 19, 1996).


Narrow issue advocacy

• The IRS has a bias against “narrow issue” election advocacy by nonprofits during election campaigns that is candidate-related. Its Rulings tend to uphold charities supporting broad-issue nonpartisan candidate activities, but not narrow issue nonpartisan candidate activities. Rev. Ruling 78-248, Situation 4.

• But the test remains a “facts and circumstances” test. For example, narrow-issue nonprofits may be able to publish a guide that carefully lists Congressional votes and cites approval/disapproval with a Member’s vote, and distribute it during an election, where the intention is not to intervene in the election.


Voter Registration

• A charity may support a voter registration or get-out-the-vote drive so long as it is conducted in a nonpartisan manner.

• The IRS considers the following factors in assessing such a drive:– Whether candidates are depicted as part of the drive;

– Whether a communication for the drive mentions a political party;

– Whether the communication is limited to urging voting and registration and is limited to describing the hours and places of registration and voting;

– Whether all voter registration and get-out-the-vote drive services are made available without regard to the voter’s political preferences.


Candidate speaking at event

• A charity may invite a candidate to speak at its event. But it may be considered to be intervening in an election unless it takes steps to ensure that there is no indication of support or opposition to the candidate by the organization.– A organization official should explicitly state that the organization

does not support or oppose the candidate when the candidate is introduced, and in any literature about the event.

– Other factors to be considered include the list mentioned earlier in the candidate forum section, i.e., whether other candidates have been invited to speak, whether questions were prepared by an independent panel, whether the topics covered by the candidate are broad or narrow, whether candidates are given an equal opportunity to speak, and whether the moderator commented on questions or indicated support or opposition to the candidate.


• Under Section 4955, an organization manager who agrees or negligently allows the making of a prohibited political expenditure by a nonprofit organization is also personally liable for a penalty tax payable to the IRS.

• But the organization manager may avoid liability by relying on advice of counsel expressed in a reasoned written legal opinion, Treas. Reg. 53.4955-1(b)(7), even if the advice is wrong.


The law is evolving• The IRS issued Revenue Ruling 2007-41 on June 18, 2007 outlining 21

hypothetical situations in which it considers in detail whether a 501(c)(3) charity engaged in unlawful political activity;

• But, the more recent Wisconsin Right to Life decision, involving a 501(c)(4) organization, is causing regulators to think twice about the current state of regulation of speech of tax exempt entities by both the FEC and IRS;

• An important request for political activities guidance by the 501(c)(3) charity www.VoteAid.org was made to the IRS on December 14, 2007 regarding its proposed activities on polling; voter registration; voter guides; and education of candidates. VoteAid seeks to engage in activities such as “micro-targeting” for voter registration purposes. In the past, the IRS might have considered these activities as crossing a line into activities that would benefit candidates for office. The request is pending;

• In the meantime, charities and other tax exempt groups must remain very cautious about engaging in any activities that could help candidates.


Avoiding Problems

• Misuse of exempt entities for political and lobbying gains has been in the news:– D.C. lobbyist Jack Abramhoff pleaded

guilty to fraud, tax evasion and conspiracy to bride public officials. A House Committee on Indian Affairs report details misuse of a Section 501(c)(3) and (c)(4) organization as part of the scheme.


• The IRS launched the “Project 302” Political Activities Compliance Initiative to audit noncompliance by 501(c)(3) charities during the 2004 Presidential election. It reviewed 166 complaints involving 127 exempt organizations related to the 2004 election.

• The IRS continued the project into 2006, reviewing additional complaints and closing a total of 105 2004/2006 cases involving 6 final or proposed revocations of tax exemption for excessive political activities. The IRS now has a dedicated audit program focusing on these issues.

• Previous published revocations usually involved church-related entities, such as Jimmy Swaggart Ministries, Operation Rescue West, Christian Broadcasting Network, and Old Time Gospel Hour.

• The 2004 initiative categorized the alleged acts of political intervention in 82 closed cases as follows:


- Campaign Literature. Exempt organizations were alleged to have distributed printed documents supporting candidates in 24 instances. In 9 cases, the IRS found illegal political intervention;

– Speakers. There were 11 allegations involving a candidate speaking at an organization function. In 9 cases, the IRS determined illegal political intervention occurred (the appearance was not part of a forum or established policy to allow all candidates to address group on equal terms);

– Voter Guides. There were 14 instances where an organization allegedly distributed an improper voter guide or candidate rating. Some were made available on the organization’s website, some were left in the back of a meeting room or church; others were accessible through website links. The IRS determined political intervention occurred in 4 cases;

– Signs. There were 12 instances where a sign for a candidate was allegedly posted on the property or at an event of the organization. The IRS found political intervention in 9 cases;

– Website candidate endorsement. There were 15 instances where an organization allegedly posted materials of a candidate on its website, or included links to a campaign website of an endorsed candidate. The IRS found political intervention in 7 cases;


– Signs. There were 12 instances where a sign for a candidate was allegedly posted on the property or at an event of the organization. The IRS found political intervention in 9 cases;

– Website candidate endorsement. There were 15 instances where an organization allegedly posted materials of a candidate on its website, or included links to a campaign website of an endorsed candidate. The IRS found political intervention in 7 cases;

– Verbal endorsement by an organization official. There were 8 instances of non-church organization verbal endorsement allegations and 19 church related complaints. The IRS determined political intervention occurred in 6 cases;

– Organization makes contribution. There were 7 cases alleged where an organization used its own funds to contribute to a campaign. The IRS found intervention in 5 cases;

– “Straw man” endorsement. There were 4 cases in which an organization allowed an individual to endorse a candidate at a speech at the organization’s function. Most of these cases involved well-known individuals. In 4 cases, political intervention was found.


PRACTICE POINTER:

• DON’T INVITE ROSIE O’DONNELL TO BE YOUR SPEAKER - YOU COULD GET AUDITED BY THE IRS!!!

30011 ivy glenn drive, ste. 223; laguna niguel, ca 92677 1-877-449-2700 | | [email protected]...

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