ABA Section of Business Law
ABA Section of Business Law
Business Law Today
September/October 2000
Nonprofits and politics
Issues are OK, candidates aren't
By JAMES R. SUTTON
F ormer congressman and Speaker of the House Newt Gingrich presents a textbook example of how nonprofit organizations should not become involved in politics.
Between 1984 and 1994, while Gingrich was running for re-election and rising to become Speaker of the House, three nonprofits organized under Internal Revenue Code Section 501(c)(3) — the Abraham Lincoln Opportunity Foundation, the Progress and Freedom Foundation and the Kennesaw State College Foundation — undertook a wide range of activities that directly or indirectly supported his electoral efforts.
They sponsored "educational forums" where Rep. Gingrich held discussions between corporate CEOs and lobbyists (that is, potential contributors). They paid a portion of his professor’s salary, so that he could develop and teach courses in his home state (that is, develop and disseminate papers on public policy issues). And they aired TV and radio ads depicting Gingrich speaking on issues of importance to the nonprofits (that is, voters).
Although lawyers for these nonprofits could argue with a straight face that these activities furthered the organizations’ tax-exempt purposes, "when taken in totality, these activities unambiguously promoted a particular result in a particular election." (Buckley v. Valeo (1976) 424 U.S. 1.) In short (at least according to the House Ethics Committee, which fined Gingrich $300,000), these nonprofits crossed the line from "public education" and "grassroots lobbying" into politicking.
With plenty of cash in his campaign account (which is also a nonprofit entity under Internal Revenue Code Section 527), why did the congressman risk investigations by the House Ethics Committee and the Federal Election Commission? And, why did these nonprofits risk their tax-exempt status?
As an electoral forum, nonprofits present several advantages for candidates over their own campaign committees. First, federal campaign committees (that is, House, Senate and presidential candidates) are prohibited from raising money from corporations and labor unions. (11 Code Fed. Regs. Section 114.2) Perhaps even more attractive to candidates, nonprofits do not have to disclose their donors to the public. (Int. Rev. Code Section 501(c)(3).) Finally, the IRS has not — at least in the past — constituted as much of an enforcement threat as have the auditors and investigators of our state and federal election watchdogs.
The biggest roadblock to nonprofit involvement in politics is the 40-year-old federal law prohibition on charities (501(c)(3)s) becoming involved in candidate campaigns on the federal, state or local level. (Int. Rev. Code Section 501(c)(3).) Passed at then-senator LBJ’s insistence (after a Texas foundation supported his opponent), the prohibition is broad: Charities cannot give money to candidates; their employees cannot spend compensated time walking precincts or attending fundraisers; they cannot sponsor PACs; and they cannot even endorse candidates in their member newsletters. (See I.R.S. Pub. No. 557, "Tax-Exempt Status for Your Organization," Nov. 1999.)
Exceptions to this prohibition are narrow. Charities may publicize the voting records of members of Congress on certain issues, as long as they cover all members and as long as they let readers draw their own conclusions about how to vote. (The Christian Coalition’s "Congressional Scorecard" and "Voter Guide.") Another exception allows clergymen to tell their congregations their personal opinions about a candidate, as long as they do not tell parishioners how to vote. (The Los Angeles First AME Church’s "endorsement services" before each election.)
The IRS instructs its auditors in its 1999 Training Manual to make candidate support a priority, but enforcement cases are rare. The IRS audits less than 1 percent of nonprofits every year. Although certain investigations, such as with Gingrich and the Christian Coalition, receive a lot of publicity, most complaints are motivated by politics rather than actual evidence of wrongdoing. And despite allegations by Republican members of Congress, the House of Representatives’ Bipartisan Joint Committee on Taxation recently found that the IRS goes after as many nonprofits that support Democrats as those that support Republicans.
As the Bush-Gore race and other November battles heat up, look for even more involvement in the elections by nonprofits, mostly via the three following legally permissible means.
First, 501(c)(3) nonprofits may legally spend money on initiative campaigns (ballot measures and referenda), as long as the subject matter of the initiative is within the charity’s tax-exempt purpose, and as long as they only spend an "insubstantial" portion of their annual expenditures on the activity. (Int. Rev. Code Section 501(c)(3); Murray Seasongood v. Comm’r (1955) 227 F.2d 907.)
To determine substantiality, the nonprofit may either follow a "facts and circumstances" test, or opt to follow a formula set up under Internal Revenue Code Section 501(h), which basically permits charities to spend up to 10 percent of their annual expenditures on initiative campaigns and other forms of "lobbying." (The majority of nonprofits that become involved in initiatives opt to use the 501(h) formula.)
One notable example of charitable spending on initiatives took place during the March 2000 campaign over Proposi-tion 22 in California, which banned gay marriages. According to the California secretary of state’s office, the Catholic Church spent more than $300,000 to pass the measure, while the Mormon Church asked its members to individually contribute to Proposition 22 as part of their yearly tithe.
A second way for charities to become involved in politics is through advertising on public-policy issues that features a legislator’s stance on the issue, but that does not "expressly advocate" the legislator’s re-election. As this activity — known as "issue advocacy" — has proliferated, so have criticisms by Common Cause and certain members of Congress, as well as FEC Commissioner Karl Sandstrom, who views the advertising as a "loophole" in our campaign finance reform system. Despite these criticisms, the IRS has explicitly concluded that issue-advocacy activities, when conducted properly, do not threaten a nonprofit’s tax-exempt status. (See IRS Ltr. Ruling No. 8936002.)
As long as the ad does not expressly advocate the candidate’s election, the issues-advocacy piece may be financed with corporate money and the nonprofit does not have to disclose the activity on any campaign reports. Although perhaps not as effective as express-advocacy campaigns (that can explicitly urge individuals to "vote for" or "vote against" a candidate), issue-advocacy activities are therefore a way for charities to raise and spend unlimited sums on candidate campaigns, without the source of these funds being made public.
Issue advocacy began in earnest during the 1996 presidential campaign. The AFL-CIO and Sierra Club aired a series of TV ads, targeted by congressional district, criticizing incumbent members of Congress on their labor and environmental votes (that is, Republicans). The National Manufacturers Association responded in kind, with TV ads criticizing incumbents’ votes on business and tax issues (that is, Democrats).
As soon as the FEC lost its first court case trying to bring these ads within its jurisdiction (see FEC v. Christian Action Network (4th Cir. 1997) 110 F.3d 1049), the floodgates opened, and the Democratic and Republican national political parties began raising corporate funds to air their own issue-advocacy ads. By the end of the 1996 campaign, the Annenberg Public Policy Center at the University of Pennsylvania estimates that between $135 and $150 million was spent on issue-advocacy pieces.
The final (and most recent) way for nonprofits to become involved in politics is by using an obscure provision in the Internal Revenue Code, known as Section 527. Congress created Section 527 in 1975, covering committees that raise money to support or oppose candidates for public office, in order to give their own campaign committees automatic tax-exempt status. (Section 527 organizations do not have to file the lengthy applications that other types of nonprofits have to file.) One of the justifications for this exemption was that Section 527 organizations would have to file detailed reports with the FEC or state campaign-filing officers (because, by definition, they would participate in campaign-related activities).
Earlier this year, the IRS issued a "private letter ruling" to the Sierra Club, advising that it could run its issues advocacy activities through a Section 527 (rather than its 501(c)(4)) organization. (IRS Ltr. Ruling No. 199925051.) Ironically, this ruling assumes that the nonprofit has "pushed the envelope" by featuring a legislator in an ad prominently enough to count as "candidate support."
The trick for the nonprofit, however, is keeping the references to the legislator within the context of his or her stance on public-policy issues, rather than in the context of his or her re-election, thereby avoiding the restrictions and reporting requirements of campaign laws. In other words, the activities of the Section 527 organization must go beyond the prohibition on candidate support by charities, but must also stay short of campaign laws.
Section 527 organizations are proliferating rapidly. Christian Coalitions on the state level have been able to reorganize as Section 527 organizations, because their Voter Guides and Congressional Scorecards feature candidates without expressly advocating their election. The Sierra Club has also decided to run its 2000 issue-advocacy activities out of a new Section 527 organization, starting with a series of TV ads attacking George W. Bush’s record on environmental issues in Texas. Former Rep. Gingrich, by the way, has formed his own Section 527 organization.
Unlike the support of initiatives, which is explicitly authorized by statute, or issue-advocacy activities, which have been sanctioned by the courts, the use of Section 527 organizations to promote (or pummel) a candidate should still be considered "novel." In other words, it may be tried, but certainly is not tested. Moreover, Congress recently passed a law to require more disclosure by Section 527 organizations (which may greatly decrease their popularity). (HR 4762, effective July 1, 2000.) In addition, the IRS could likely audit some of these new organizations, and refer potential wrongdoers to the FEC.
All of the examples discussed in this article highlight two truisms. First, nonprofits will continue to look for ways to influence elections. Nonprofits throughout the country — perhaps more than for-profit entities — care who is elected to Congress and state legislatures, viewing the political process as essential to their tax-exempt purpose and to their constituencies.
Second, the only guaranteed result of new campaign finance reform laws is the "law of unintended consequences." No one could have anticipated the number of issue-advocacy pieces filling our airwaves and mailboxes, nor could they have foreseen Section 527 organizations being used to avoid disclosure. As Congress moves to close these loopholes, we can anticipate that charities and politicians will come up with new ways to get involved in the political process.
Sutton is a partner at Nielsen, Merksamer, Parrinello, Mueller & Naylor in San Francisco. He also teaches election law at Hastings Law School in San Francisco.
Back to September/October Business Law Today | Back to Business Law Home Page
