Political Law Notes - August 2018

Date: 02/07/18
Stand Up and Be Heard in an Election Year

Originally published by ASAE.

Nonprofit organizations are often overly cautious in speaking out about their causes and interacting with candidates in election years for fear of violating a complex set of laws and rules. You can and should participate in the election-year conversation. Here's how. 

When elections are on the horizon, nonprofit organizations often wonder, “What can we do this election year to further our government affairs and public policy agenda without getting in trouble?” Their concern is understandable: associations and other nonprofit organizations must comply with complex and sometimes contradictory tax, campaign finance, lobbying, and government ethics laws and rules. 

But nonprofits do not give up their constitutional free speech rights or their right to petition the government during even-numbered years. To the contrary, election years are perhaps the most critical time for nonprofit organizations to be heard, particularly when their most important issues are the focus of national debates and elections.

Several options are available for nonprofit organizations to advocate on their issues and interact with candidates in this and every election year, while avoiding political law pitfalls that can trip up the unwary.

501(c)(3) Organizations: Advocating on the Issues

Under the Internal Revenue Code, Section 501(c)(3) organizations (including professional and cause-related groups, as well as other charities) are subject to the most extensive restrictions on the scope of their election-year activities. Nonetheless, the rules include broad exceptions that create opportunities.

The most important is that there are no limits whatsoever on discussing and advocating on public policy issues of importance to an organization's members and supporters. The rules become a little more challenging when legislation is involved, but a 501(c)(3) organization may still engage in lobbying as long as it is not a “substantial part” of the organization's overall activities. The nonprofit may also make a so-called Section 501(h) election, which provides a safe-harbor limit for permissible lobbying expenditures that is workable for most small and medium-sized organizations.

For example, if legislation is involved, the restrictions apply only to directly lobbying legislators or encouraging your organization's members or the public to do so. A national print, broadcast, or social media campaign that is solely designed to sway public opinion to support your public policy agenda or even specific legislation will not count as lobbying for tax purposes, as long as there is no “call to action” for the audience to contact their legislators.  When an organization does engage in direct or grassroots lobbying, federal and state lobbying laws may impose registration and reporting requirements.

The greatest challenge comes from the IRS rules that prohibit 501(c)(3) organizations from trying to influence elections. However, they do not prohibit you from communicating about issues that divide political candidates.

The IRS applies a subjective “facts and circumstances” test to determine whether an organization's communications and activities favor or oppose a particular candidate. The factors include whether messages contain references to candidates, campaign positions, voting, or elections, as well as the timing of the communications and whether there may be nonpolitical reasons for them. For example, a 501(c)(3) organization may sponsor ads taking a position on legislation, especially when a vote on the matter is scheduled before the election. If the organization has a history of sponsoring ads taking a position on a legislative or policy issue, the message is less likely to be seen as trying to influence an election. (An explanation and practical applications of this “facts and circumstances” test can be found in IRS Revenue Ruling 2007-41 [PDF].)

Section 501(c)(3) organizations may also sponsor nonpartisan voter education activities, such as publishing voter education guides. They can encourage individuals to participate in the electoral process through voter registration and get-out-the-vote drives, which might include activities such as setting up a registration booth at a convention or public meeting. These efforts must be nonpartisan—they cannot favor or oppose candidates—but you can choose your location and audience.

Finally, 501(c)(3) organizations may sponsor a wide range of candidate forums. They may invite candidates to speak individually at organization events or to appear in candidate debates, as long as the candidates are treated equally. These types of events must also comply with Federal Election Commission (FEC) rules.

For 501(c)(3) organizations that want to engage in more substantial lobbying activities beyond their 501(h) expenditure limits or wish to support or oppose candidates in their political campaigns, the solution may be to set up an affiliated 501(c)(4) or 501(c)(6) organization. The affiliated organization may also establish a political action committee (PAC) to make contributions that are otherwise prohibited.

501(c)(4) and 501(c)(6) Organizations: Supporting Candidates

The Internal Revenue Code allows 501(c)(4) organizations (so-called social welfare advocacy organizations and 501(c)(6) organizations (trade and professional organizations) to engage in unlimited lobbying and public issue advocacy activity. When supporting candidates, these nonprofits must comply with overlapping—and sometimes contradictory—tax and campaign finance rules. The tax code permits nonprofits to make political contributions, support independent candidate advocacy communications, and engage in other election related activities, provided that this is not the organization's primary purpose. The campaign finance laws in many states permit incorporated entities (both nonprofit and for-profit) to make political contributions, although they are frequently subject to dollar limits.  On the other hand, federal campaign finance law and some states, prohibit incorporated entities from making monetary or in-kind political contributions to candidates and political committees.   But an advocacy, trade, or professional organization can establish a PAC to make contributions to candidates.

Given this confusing regulatory environment, 501(c)(4) and 501(c)(6) organizations are often hesitant to engage in activities relating to candidates or political parties in an election year for fear of tripping over contribution restrictions. Fortunately, FEC rules offer many opportunities for candidate engagement that may be of use to your organization. For example, a 501(c)(4) or 501(c)(6) can conduct any of the following activities without triggering contribution concerns:
  • Communicate with the general public on any subject and through any means, including communications expressly advocating for or against candidates, as long as the communications are not planned or coordinated with any candidate. 
  • Invite a public official to speak at an issue-oriented event where the official is not appearing in his or her capacity as a candidate.
  • Distribute nonpartisan voting records and voter guides.
  • Invite a candidate to appear before the organization's “restricted class”—its supervisory, managerial, and professional employees and its individual and corporate members—and even urge attendees to contribute directly to or vote for the candidate, provided that the organization does not collect and forward any contributions.
  • These organizations can also establish a PAC, which can solicit contributions from the restricted class and support candidates and political parties. In contrast to the sponsoring organization, the PAC, as a separate legal entity, has no overall expenditure limit on political activities. The PAC may, however, be subject to limits on the amount it can contribute to particular candidates and political committees.  A PAC is a well-established and safe vehicle for supporting candidates. Trade and professional organizations, in particular, are likely to have many meetings and events at which PAC contributions can be solicited from members.

While candidates always appreciate receiving PAC contributions, a PAC can be used to support candidates in other ways as well. For example, a federal PAC can host a fundraiser and invite anyone who can legally make a political contribution to attend and give to the candidate. For this type of event, the PAC is not limited to soliciting contributions from its restricted class. Similarly, a federal PAC can encourage the public to contribute to specified candidates. A PAC can also pay for a candidate's campaign costs within the contribution limits, such as renting a sky suite at a baseball game for a fundraiser. In the long run, a candidate might appreciate these forms of leveraged support far more than a one-time contribution. Keep in mind that separate, and frequently differing, rules apply to PACs created under state law.

Strategic Use of Ethics and Gift Rules

Interacting with candidates for office and elected officials is a central component of most government affairs strategies. This may include providing certain items of value to an official, as long as the organization offering the gift first considers applicable federal or state ethics rules. Fortunately, these rules offer many opportunities for providing things of value to public officials in ways that can support your organization's government affairs efforts, provided that the organization takes steps to understand and follow the applicable limitations.  

For example, at the federal level, while presidential appointees are subject to strict restrictions and gift limits, most other executive branch officials and congressional officials can attend a wide range of functions hosted by nonprofit organizations where food, beverages, and sometimes entertainment are provided. In addition, organizations can usually give officials plaques, awards, and other commemorative items, as well as informational materials about the organization's industry or cause. These activities may be of even more strategic value if conducted locally with constituents rather than in Washington, DC. Plan your activities in advance to comply with the gift rules so that you avoid the embarrassment of requesting the return of a gift or the imposition of sanctions that may accompany ethics violations.

Advocating on issues and engaging with or supporting candidates are essential activities for many nonprofit organizations in this and every election year. Organizations that take the time to understand the flexibilities that exist in the tax, campaign finance, lobbying, and ethics rules will find many opportunities for achieving their public policy goals.  
DC Federal District Court Voids FEC Independent Expenditure Reporting Rule - Expands Donor Disclosure

In an opinion released on August 3rd, US District Court Judge Beryl Howell greatly expanded the FEC donor disclosure reporting requirements for independent groups – like Section 501(4) and 501(c)(6) organizations – that sponsor independent expenditures and other candidate advocacy communications.  The court delayed the implementation of its ruling for 45 days to give the FEC time to draft interim rules.

The case, Citizens for Responsibility and Ethics in Washington v. FEC and Crossroad Grassroots Policy Strategies, concerns a 38 year-old FEC rule requiring an organization not registered with the FEC to include in its independent expenditure reports only the names of donors who contribute more than $200 for the specific purpose of furthering the communication that is the subject of report.  The court found this rule to be impermissibly narrow and contrary to the clear wording of the statute.  The statute, by contrast, mandates the disclosure of donors who give for the purpose of furthering “an independent expenditure” – which the court interpreted as meaning any independent expenditure and not just the specific communication covered by the report. 

For years, many independent groups, such as 501(c)(4) and 501(c)(6) organizations, have not asked donors to finance specific candidate advocacy communications or shared the contents of proposed communications to avoid having to disclose the identity of their donors under the existing rule.  Under the court ruling, however, donors whose funds are used to support any candidate advocacy communications sponsored by the group must be disclosed as long as the donor knows that the donation may somehow be used for independent expenditures (such as by being shown examples of express advocacy videos and ads).  The decision did not stop there, however.  

Judge Howell also ruled that the FEC regulation completely overlooked another disclosure obligation applicable to these non-FEC registered organizations.  The campaign finance law requires organizations supporting independent expenditures to disclose the identity of its contributors who give more than $250 to support its political purposes of influencing elections generally, regardless of whether they intend to help finance candidate advocacy communications.  This could cover, for example, donors whose contributions are used by the organization to support a separate Super PAC or to fund partisan voter registration or get out the vote drives.  Disclosure would be required even if funds are contributed for the general purposes of the organization.  

The current FEC rules do not require any such disclosure.  The ruling raises the possibility that virtually any contributor to an independent group that engages in political activities or supports Super PACs or other organizations that do so may have to be identified to the FEC. 

Judge Howell's decision raises a number of near-term and long-range questions.  The immediate question is whether the FEC or Crossroads Grassroots Policy Strategies will appeal the decision – a result that seems highly likely.  In that case, will Judge Howell's decision be stayed over the next few months, which includes the 2018 pre-election run-up?  Given the courts' historical reticence to change campaign finance rules close to an election, it would not be unusual if the decision is stayed while the appeal is pending.  

If the decision is not stayed, will the FEC Commissioners be able to agree on new regulations?  With only four Commissioners and two vacant seats, a stalemate is a real possibility.  In that event, independent groups may be left with just the statute and the court's ruling for guidance.  

If Judge Howell's ruling is ultimately upheld, it is sure to affect the decisions of persons who consider supporting an independent advocacy group's activities – whether by helping finance candidate communications or underwriting other political activities.  Still, will donors curtail their financial support of these groups or will they find other avenues for redirecting their support or just be willing to have their names disclosed?

For the time being, independent groups and their donors should be cautious and consult counsel so that they understand the impact of the decision on their political activities and their disclosure obligations.
IRS Ignites Political Firestorm by Eliminating the Requirement for Most Nonprofit Organizations to Submit Confidential Donor Information to the IRS

On July 16, 2018, the IRS announced that it has eliminated the requirement for most nonprofit organizations to provide confidential donor information to the IRS on Schedule B to their annual IRS Form 990.  Although limited in scope and with no impact on public transparency, the change has significant political ramifications and has ignited a firestorm of support and condemnation across the political spectrum.  This includes a partisan Senate Finance Committee vote and delay in the Senate confirmation vote on the new IRS Commissioner.

Starting with tax years beginning in 2018, most nonprofit organizations will only need to report to the IRS the amounts given each year by their major donors ($5,000 or more).  They will no longer need to report their donor names or addresses in the taxpayer confidential version of Form 990, Schedule B filed with the IRS.  However, Section 501(c)(3) and 527 political organizations must still disclose their donor names and addresses to the IRS.  Every nonprofit organization will still be responsible for collecting and maintaining major donor names and addresses in case it is ever needed or requested by the IRS.  See Rev. Proc. 2018-38 for further legal background and details.  

It is important to emphasize that this policy change only eliminates the information that must be provided to the IRS in what is currently the taxpayer confidential version of IRS Form 990, Schedule B.  It does not reduce public transparency in any way.  Currently, names and addresses already are redacted in the public inspection version of Schedule B and are strictly protected from public disclosure by statute.  The new policy does not change the information that is currently required to be made publicly available both by the IRS and nonprofit organizations– which is just the donated amounts (even though some organizations voluntarily chose to disclose more).  

For several years, the IRS has been considering eliminating Schedule B for administrative reasons.  This past spring, a broad coalition urged that Schedule B be eliminated both to protect constitutional freedoms and to help prevent further targeting of nonprofit organizations and their donors on the basis of ideology both by the IRS and state officials.  Recently, the formal Advisory Committee to the IRS recommended eliminating Schedule B to encourage e-filing.  While the IRS does not appear ready to go that far yet, the announced changes more closely align the IRS filing rules with the statutory public disclosure requirement that applies to Section 501(c)(3) and 527 organizations.  The IRS is reversing its prior administrative actions, which expanded this requirement to include other nonprofit organizations.

The Stated Rationale

In announcing the reasons for this change in its Press Release -- the Treasury Department stated that the new policy will:
  1. “No longer require certain tax-exempt organization to file personally-identifiable information about their donors” and “relieves” most nonprofit organizations of an “unnecessary reporting requirement” to “send the IRS information that it doesn't need to effectively enforce our tax laws.”  This change “will in no way limit transparency” – since the publicly available information will stay the same as before.
  2. “Better protect taxpayers by reducing the risk of inadvertent disclosure or misuse of confidential information.”  This was cited as “an especially important safeguard for organizations engaged in free speech and free association protected by the First Amendment.”  It will also “reinforce the reforms already implemented by the IRS in the wake of the political targeting scandal and enhance public trust in the [IRS].”
  3. “Save both private and government resources” required to create redacted versions of Schedule B for public inspection.
The Controversy

The rationale stated by the Treasury Department in its Press Release and the IRS in Rev. Proc. 2018-38 is supported by organizations that fear that their donors are at risk for public harassment and boycotts that could result from inadvertent disclosure of their identities (as has occurred sometimes in the past).  If the IRS has no regulatory or administrative use for this information, why should disclosure be required?  They argue that disclosing even the amounts of donations chills free speech and free association by indicating the size and number of donors.  The change also helps reduce the possibility of future targeting of organizations and their donors by the IRS and state officials.  They believe that the reform does not go far enough and that Schedule B should be eliminated entirely in order to provide the greatest constitutional protections.

The strong response by those who decry “dark money” and favor robust disclosure is that the past rule did not go far enough.  They argue that donor names should be made publicly available.  Because Citizens United has opened the floodgate of political intervention by nonprofit organizations and the Supreme Court also has endorsed public disclosure when it involves campaign finance, the IRS should be more aggressive in obtaining donor information and policing nonprofit activities.  They also would like donor information to be made available to public watch dog organizations to help with the effort.

The reply is that the IRS is a tax collection agency and hasn't been statutorily authorized to regulate free speech and association activities.  Moreover, when it entered into this area in the past, there was political targeting and other auditing abuses of both organizations and individual donors whose names were disclosed to the IRS in Schedule B. 

The counter-reply is who is better situated than the IRS to police nonprofit political activities.  Also that the IRS needs this information to guard against private benefits.  They add that the IRS should be tasked with monitoring foreign contributions.  

The suggested answer is that the IRS could add checklist questions to the Form 990, if appropriate, to address these issues and require responses in a more discrete and protective manor (instead of requiring the names and addresses of all donors to be filed with the IRS).

The States

One final point to consider is how states like California and New York that currently require the filing of unredacted copies of Schedule B in support of charitable solicitation registrations will react.  Beginning in 2018, will they accept Schedule B without donor names or will they implement their own new donor disclosure forms?  Will this help resolve or further fuel years-long litigation against California and New York over donor disclosure?


Notwithstanding the limited scope of the new policy, the controversy grows -- with points and counter points, articles, editorials, letters, hearings and lobbying heating up on all sides.  The new IRS rule is reigniting and fueling far broader controversies over money and politics.  

Where and when will it all end? Not soon, so stay tuned!