Pillsbury Memo on Citizens United ASAE The Center for by mikeholy


									 Issues for Nonprofit Organizations Raised by January 21 U.S. Supreme
               Court Decision in Citizens United v. FEC
                             Pillsbury Winthrop Shaw Pittman, LLP
                                        January 28, 2010

1. Section 501(c)(3) Organizations. How does the Supreme Court decision affect an IRC
Section 501(c)(3) tax-exempt organization -- charitable, scientific, educational, religious --
which is prohibited from engaging in any political activity?

The prohibition against political activity for Section 501(c)(3) organizations continues and is not
changed by the Supreme Court’s decision. The Internal Revenue Service maintains a "no
tolerance" test for political activity prohibited in this category of federal income tax exemption.
Independent expenditures by a Section 501(c)(3) organization supporting a candidate for elective
office would clearly violate the prohibition. The constitutionality of the prohibition has been
addressed by the U.S. Supreme Court and confirmed; essentially the Court concluded that
organizations have traded their free speech rights in this area for the benefit of tax exemption in
this category; see Reagan v. Taxation with Representation of Washington, 461 U.S. 540 (1983).
This prohibition could be re-considered, or even overturned, in some future case, since the
Supreme Court had also previously upheld the ban on corporate independent expenditures which
it has now reversed.

2. Section 501(c)(6) Organizations. How does the Supreme Court decision affect a Section
501(c)(6) membership organization – a trade association, a professional society, etc. -- which
must give notice to its members each year of the percentage of members' dues that are not tax
deductible by the members by reason of the organization's lobbying expenditures or, in the
alternative, must itself pay a "proxy tax"?

Political activity expenditures are included in the definition of "lobbying" expenditures that
affects the extent of members' dues non-deductibility or the organization's alternative proxy tax.
IRS Regulations at Section 1.162-20(a)(1) interpret the non-deductibility broadly, disallowing
amounts paid "for political campaign purposes (including the support of or opposition to any
candidate for public office)." Independent expenditures now permitted by the Supreme Court
decision would constitute amounts paid for political campaign purposes. Therefore Section
501(c)(6) organizations would be required to include independent expenditures in their
calculations when they notify members as to what percentage of members' dues are estimated to
be non-deductible or in their calculations when they pay the alternative proxy tax.

3. “Independent Expenditures.” What should an organization do to make sure that its
independent expenditures are truly "independent" and will not be considered direct campaign
contributions that remain illegal for corporations including incorporated nonprofit

Essentially the organization must avoid coordinating its communications that are the subject of
purported independent expenditures with candidates, political parties, or the agents of either.
According to the Federal Election’s Commission’s regulations, 11 CFR 109.20(a), a
communication is coordinated, and therefore not “independent,” if it is made in cooperation,
consultation or concert with, or at the request or suggestion of, a candidate, a candidate’s
committee or their agents, or a political party committee or its agents (the “candidate or party”).
In order for a communication to be considered “coordinated,” it must satisfy the Commission’s
lengthy and complex three-prong test addressing: (a) the source of payment, (b) the
content/subject matter, and (c)the conduct (the interaction between whoever is paying for the
communication and the candidate or political party). Only a communication that satisfies all
three criteria is considered coordinated. It is not necessary for there to be a formal agreement or
formal collaboration for a communication to be a “coordinated” communication. A candidate’s
or party’s response to an inquiry about that candidate’s or party’s positions on legislative or
policy issues, which does not include discussion of campaign plans, projects, activities or needs,
is not considered the basis for an organization’s “coordinated” communication. Use of materials
from publicly-available sources is also not considered the basis for an organization’s
“coordinated” communication.

4. State Candidates. Are independent expenditures now permitted even for state candidates in
states where there are statutory or regulatory bans on independent expenditures by

It will depend on what occurs in each state that has an explicit or implicit ban on independent
expenditures and on the wording of the ban. Some states may spontaneously and independently
declare previously-banned independent expenditures by corporations to now be permitted (Texas
did so on January 26, for example). In other states there may be legislative action or civil court
action necessary before one can be certain that previous bans on independent expenditures by
corporations have been lifted with respect to state candidates for state elective office by virtue of
the U.S. Supreme Court decision.

5. Federal Excise Tax. An excise tax now applies when an exempt organization makes a direct
campaign contribution to a state-race candidate in a state where those direct campaign
contributions by corporations are permitted (Illinois, for example); will that excise tax apply to
independent expenditures?

The excise tax most likely will apply to independent expenditures permitted by the Supreme
Court decision. Section 527(f) of the Internal Revenue Code provides that an exempt
organization that is not a “political organization” (such as a political action committee or PAC)
will be subject to an excise tax if the organization expends any amount during the taxable year
directly (or through another organization) for an “exempt function,” which is defined in Section
527(e)(2) of the Code as "the function of influencing or attempting to influence the selection,
nomination, election, or appointment of any individual to any Federal, State, or local public
office or office in a political organization, or the election of Presidential or Vice-Presidential
electors, whether or not such individual or electors are selected, nominated, elected, or
appointed." Because the corporate independent expenditures allowed by the Supreme Court
decision clearly fall within this definition of an “exempt function,” the expenditures can be
expected to give rise to the excise tax under Section 527.

6. Federal Contractors and Grantees. Does a nonprofit organization that is a federal
contractor or grant recipient benefit from the Supreme Court decision lifting the ban on
corporate independent expenditures?

This remains unclear. The Supreme Court did not deal with the federal contractor ban (2 USC
441c; 11 CFR 115.1 et seq.) which speaks in terms of contributions and expenditures to (but not
more explicitly, as in the case of independent expenditures, on behalf of) federal candidates and
political parties and committees. This is different than the "in connection with any election"
language in 441b that the Supreme Court addressed. Therefore the prohibition appears to be
narrower and could pass constitutional muster. Arguably, the same rationale expressed by the
Court in its affirmation of the rights of corporations to make independent expenditures might
reasonably apply as well to federal contractors, whether corporate or not. On the other hand, the
federal courts -- and ultimately the Supreme Court -- might find a compelling reason to uphold
the ban because of the status of federal contractors [just as the Supreme Court once upheld the
ban for Section 501(c)(3) exempt organizations]. As matter of caution, therefore, the ban
should be treated as still in effect for federal contractors and grantees until clarification is
supplied either by an opinion of the Federal Election Commission or a federal court.

7. PACs. Can nonprofit organization-administered political action committees make
independent expenditures from PAC funds?

Yes. This remains unchanged.

8. FEC Reporting. What are the rules on reporting independent expenditures at the federal

The rules are detailed and complex. Essentially, under the current Federal Election Commission
regulations, persons or entities that make expenditures of $1,000 or more during a calendar year
become “political committees” subject to FEC reporting. A person or entity that is not a political
committee and that makes independent expenditures aggregating in excess of $250 with respect
to a given election in a calendar year must file a report on FEC Form 5. Those filing reports
must do so in accordance with the quarterly reporting schedule and must file reports for any
quarterly period during which the independent expenditures that aggregate in excess of $250 are
made and in any quarterly reporting period after that in which additional independent
expenditures are made. If independent expenditures exceed $10,000 in a calendar year, the
reports must be filed electronically. Additionally, depending on the timing of the
communications in relation to a particular election, 24-hour or 48-hour reports may be triggered.
9. Foreign Corporations. Can Foreign Corporations now make independent expenditures as
indicated by President Obama in his State of the Union speech on January 27?

No. The court did not deal with that issue. The court was dealing with 2 USC 441b; the foreign
national prohibition is in 441e. The foreign national ban should be assumed to be in full effect
until a federal court rules otherwise. Here is a pertinent excerpt from the Supreme Court’s

       "We need not reach the question whether the Government has a compelling
       interest in preventing foreign individuals or associations from influencing our
       Nation's political process (citation omitted)…Section 441b is not limited to
       corporations or associations that were created in foreign countries or funded
       predominantly by foreign shareholders. Section 441b would be overbroad even if
       we assumed, arguendo, that the government has a compelling interest in limiting
       foreign influence over our political process…." (Majority opinion at 47).

10. FEC Reaction. What can we expect next?
The Federal Election Commission has made a statement that it is considering the impact of the
Supreme Court’s decision on existing FEC regulations, as well as ongoing enforcement
processes; the Commission will be providing guidance to the public as soon as possible
regarding what steps will be taken to comply fully with the decision.


The following Pillsbury attorneys contributed to this summary: Fred Lowell, Jerry Jacobs,
Emily Barrett, and Megan Spratt.

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