Nonprofit Report - April 2016

Date: April 14, 2016

Election 2016: Know the Rules for Supporting Candidates
By: James A. Kahl, Esq.

Originally published by ASAE in Associations Now Plus

Elections pose abundant opportunities for associations to support candidates aligned with members' interests. But the law governing election-related activities by associations has shifted drastically in recent years. Before your organization supports or opposes political candidates, be sure you know the rules.

As in past election cycles, this year many trade associations, professional membership organizations, and other tax-exempt entities will support candidates and political parties through PAC contributions and contributions from their members and by sponsoring communications promoting or opposing candidates and parties. The laws and rules governing this activity can be complex and confusing, and they have undergone dramatic changes in recent years. Now, seemingly routine election-related activities can present significant compliance challenges. If your organization is considering supporting federal, state, or local candidates in 2016, you need to know the rules that apply to your activities.  

All incorporated entities, including associations and other tax-exempt organizations, are prohibited from contributing directly to federal candidates and political parties. About 20 states prohibit contributions from incorporated entities in state and local elections, while the remaining states impose limits on the amount of such contributions. Only six states -- Alabama, Missouri, Nebraska, Oregon, Utah, and Virginia -- permit unlimited contributions from incorporated entities. 

In addition, at the federal level and in many states, incorporated entities are prohibited from using their resources to support and raise contributions for candidates -- a practice called "corporate facilitation." When this occurs, the aggregate value of the resources and facilities that were used is treated as an illegal in-kind contribution. 

For example, an association executive may not use the organization's letterhead, member lists, postage accounts, or copiers to raise, collect, or forward funds from individuals for a private fundraising event at her home. In most instances, association officials are also barred from ordering their support staff to plan or carry out a private fundraising event as part of their work responsibilities, unless payment for their services comes from an appropriate source, such as the campaign. This type of activity has resulted in many of the highest civil penalties levied by the Federal Election Commission (FEC).

Fortunately, there are many ways for associations and their members to interact with candidates at conferences, conventions, and other gatherings and to provide financial support from political action committees (PACs) and other lawful sources of campaign contributions. But careful planning and an understanding of the applicable federal or state rules are essential whenever candidates are invited to speak to an association's employees and members, especially if fundraising will take place. 

Maximize Your PAC's Potential 

Associations should not overlook opportunities to expand the reach of their PACs. Under federal law, associations can solicit PAC contributions only from restricted-class members -- that is, from eligible employees of the association and its corporate members and from individual association members. But corporate members can use their payroll-withholding systems to collect and forward contributions from their participating restricted-class employees. Members also can donate funds to cover PAC administration and fundraising activities and can donate raffle items and door prizes for PAC fundraising events. 

While associations cannot solicit PAC contributions from the general public, the FEC has allowed PACs to reach out beyond the restricted class to help favored candidates. An association PAC is permitted to communicate with the general public through the PAC's website or by email and request that individuals contribute directly to specified federal candidates. 

Associations should keep in mind that in many states their federal PACs can be used to support state and local candidates. For example, due to a change in Wisconsin law that took effect at the beginning of 2016, most FEC-registered PACs no longer have to register and report with state regulators to make contributions to state and local candidates. Other jurisdictions -- including Kentucky, New Mexico, Ohio, South Carolina, and Texas -- have minimal or no reporting requirements for federal PACs contributing in local elections. 

In a few states, however, a federal PAC must file the full range of reports required for state PACs or may even have to establish an entirely separate PAC with its own bank account within the state. Be sure to review local campaign finance laws before making a contribution to a state candidate with federal PAC funds, as one small state or local political contribution could subject the federal PAC to rigorous, ongoing state reporting requirements.

Understand Disclosure Rules 

In 2016, as in every election since the Supreme Court's landmark 2010 ruling in Citizens United v. Federal Election Commission, tax-exempt entities (with the exception of 501(c)(3) organizations) will be the sponsors of most independent candidate advocacy communications. While the Supreme Court opened the door for all incorporated entities to spend unlimited amounts on such "independent expenditure" communications, few for-profit corporations have been willing to cross that threshold. But they have been far less reluctant to fund advocacy communications by their industry groups and advocacy organizations.  

The major concern for organizations sponsoring candidate advocacy communications is the extent to which they must publicly disclose the amount of their spending and the identity of their donors. In Citizens United, eight justices voted to uphold the federal campaign finance law's requirement that political ads identify their sponsors. 

In just the past two months, two federal circuit courts have handed down decisions based on Citizens United requiring tax-exempt organizations to disclose the identities of persons who provide funds for electioneering communications -- ads depicting, but not expressly advocating for or against, a candidate. Van Hollen v. FEC, a District of Columbia Circuit case, upheld the FEC's electioneering communication disclosure rules, and Independence Institute v. Williams, a Tenth Circuit case, upheld Colorado's nearly identical law.

Associations and other tax-exempt organizations contemplating candidate advocacy communications in state elections should review the relevant campaign finance rules to determine if they are required to disclose their donors. These laws vary considerably from jurisdiction to jurisdiction. For example: 

  • Any tax-exempt group receiving contributions of $2,000 or more to make political expenditures in California must register as a committee and file campaign reports identifying donors.
  • In New York, registered tax-exempt organizations that make $10,000 in advocacy communications must identify donors of $1,000 or more. 
  • In other jurisdictions, disclosure can be avoided, depending on how funds are requested from members and which association funds are used to finance the communications.

Political engagement is a core function for many trade associations, professional membership organizations, and other tax-exempt entities. In an election year, opportunities will abound for ensuring that political leaders understand your association's concerns and for your association and its members to support candidates who understand your policy goals. Missteps in the political law arena, even if inadvertent, can be costly and embarrassing and can undermine your advocacy efforts. Taking steps to understand and follow the rules for supporting candidates will protect your organization's reputation and promote your political goals.

Update for Social Welfare Organizations
By: Eileen Morgan Johnson, Esq.

The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) created the new IRS section 506. This section requires social welfare organizations (those claiming exemption under § 501(c)(4)) to provide notice to the IRS of their existence no later than 60 days after their formation.  

The PATH Act requires social welfare organizations that were in existence on or before December 18, 2015 to notify the IRS of their existence by June 15, 2016 unless they had submitted an IRS Form 1024 or Form 990 prior to December 18, 2015. 

An organization that fails to file the notice within 60 days of its formation is subject to a penalty of $20 for each day that it fails to submit the notice with a maximum penalty of $5000.

Notice 2016-09 extends the due date for these submissions to at least 60 days after the temporary regulations are issued.  The IRS has requested that social welfare organizations wait until the temporary regulations are issued to submit any information to the IRS.  The IRS will be developing a form for submitting the required notice and will also establish a user fee for this filing.