Bright lines? Safe Harbors?

Transcription

1 Bright lines? Safe Harbors? Author: ELIZABETH J. KINGSLEY (Originally published in the journal Taxation of Exempts, Volume 20, Number 01, July/August 2008) Despite a recent uptick in the quantity of available guidance 1, charities and their advisors remain frustrated with the lack of clarity around the definition of political campaign intervention. This activity, which the IRS claims it cannot describe precisely but knows when it sees it, is strictly prohibited to Section 501(c)(3) organizations. Even the tiniest amount can put an organization's exempt status at risk 2. More than 50 years after the addition of this prohibition to the Code, 501(c)(3)s still face tremendous uncertainty in how to comply with it. The problems caused by this lack of clarity are compounded by an increased focus on enforcement. Recent years have seen the IRS assert that a church intervened in a political campaign based solely on comments critical of presidential candidates made by a priest in a sermon delivered as part of the church's regular worship service. Although the Service ultimately determined not to pursue sanctions against the church, it did not back down from the position that the sermon constituted campaign intervention 3. In contrast, remarks made by the NAACP chairman that were critical of President Bush were ultimately determined not to be campaign intervention 4. In neither case did the resolution provide useful insight for other organizations. The IRS gave no basis for its conclusion that the sermon was impermissible other than to say that it was "based on the existing record." Almost laughably, the IRS explained its reversal in the NAACP case by saying that reviewing a video recording of the speech allowed it to conclude that no intervention occurred. Apparently, some intangible element in the video allowed the viewer to reach a conclusion unavailable to someone merely reading the text of the speech. These examples highlight the challenges facing 501(c)(3)s that want to speak out about public policy issues during an election season. The lack of definition to "campaign intervention" leaves them in the dark if they want to use the excitement of elections to draw attention to their issues, encourage candidates to adopt the charity's position, or provide analysis of a major policy that is put forward by a candidate and, as a result, subject to public debate. The growing frustration in the nonprofit community has led some to call for establishment of some "bright-line" guidance 5. One may remain skeptical about the prospects of obtaining any such guidance from the IRS, but it is nonetheless worth giving some thought to what a clear and understandable definition of campaign intervention might look like. 1 Rev. Rul , IRB In practice, revocation is unlikely in all but the most extreme cases. In audits arising out of the 2004 election cycle, the IRS identified campaign intervention in 37 church and 19 non-church cases. Only three of the non-churches and none of the churches were proposed for revocation. The disconnect between the potential and likely penalties creates even more frustrating uncertainty in this area. "Project 302: Political Activities Compliance Initiative, Final Report (2/22/06), available at 3 Letter from IRS to All Saints Church (9/10/07) available at 4 Letter from IRS to NAACP (8/9/06) available at charitygovernance.blogs.com/charity_governance/files/no_problem_letter.pdf. 5 For instance, in August 2007, the nonprofit advocacy group OMB Watch convened a panel to discuss this question. Details of the event are available at

2 Bright line or safe harbor? From the regulator's perspective, the problem with a bright line is that it might create opportunities for evasion. A clear standard that taxpayers are entitled to rely on could allow political operatives to use charitable funds to influence political campaigns yet remain safe from IRS enforcement. As a result, any standard that might be adopted would probably be overly restrictive, treating as impermissible activities that should be allowed under a reasonable analysis of all the facts and circumstances. Some charities may be willing to give up a degree of flexibility in the range of permitted activity in exchange for legal certainty, but many may disagree. They will want to continue to raise their issues in the context of political campaigns in a way that cannot be described with a "safe" bright-line rule of general applicability. An alternative approach would be to establish a safe harbor. This could be drawn conservatively enough to alleviate concerns of evasion, yet still provide the charitable community with more certainty than it has under an undefined "facts and circumstances" test. Of course, creation of a safe harbor also gives rise to the danger that activity falling outside it would be presumptively impermissible. This may be a risk worth taking in exchange for added protection of issue speech by charities. Safe harbor for communications Communications and speech are not the only ways in which an organization may intervene, of course. This creates an extra challenge in drawing any bright-line definition. To capture all possible means of intervening, it would have to include multiple elements not only a description of campaign speech, but also tools to identify voter engagement activities that support (or oppose) candidates based on non-speech elements, such as targeting, or surreptitious types of in-kind support, such as preferred access to a charity's mailing list 6. A safe harbor might begin with speech, the thorny area where legitimate lobbying or other policy advocacy can become entangled with political campaign intervention. This entanglement starts when issue discussion refers either to candidates or elections (or both). Perhaps, then, a starting point can be the assertion that an organization's communication will not constitute campaign intervention if it does not refer, either directly or indirectly, to candidates, political parties, candidacy, voting, or elections. A message that is purely about issues or the organization itself, with no reference to candidates or elections, would be a very unlikely vehicle for effective campaign intervention. Is it imaginable that such a message might, in unusual circumstances, have some electoral effect? Possibly. A reminder about the importance of national security and the threat of terrorism, or the terrible and mounting toll of the war in Iraq, delivered on the eve of the 2004 presidential election, arguably might have resonated as supportive of one candidate or the other. Nonetheless, this effect would be quite indirect without any mention of the act of voting or any allusion to the campaign or candidates. It would be an extraordinarily hard for the IRS to make the case that such a pure issue message should be treated as campaign speech 7. Indeed, there is no legal precedent treating a communication meeting this standard as campaign intervention, nor have there been any reported cases of the IRS even attempting to assert such a position. 6 Even if the list is rented for a fair market payment, allowing one candidate to rent the list but not extending the opportunity to the other will be considered campaign intervention. Rev. Rul , Situation See TAM (5/24/89) (permitting a (c)(3) peace organization to place advertisements regarding defense issues in the weeks surrounding the 1984 presidential debates).

3 A useful definition cannot stop here. Pure issue discussion is not the area where charities face the greatest challenges. Surely some ground can be carved out for speech that refers to candidates but not elections, elections but not candidates, or even both 8. It is also worth noting that some of the standards proposed below do not actually draw an entirely "bright" line. The question of a "wedge" issue, for instance, will always be contextual and arguably subjective. Practitioners used to the (generally) clear rules of campaign finance laws may find this fuzziness particularly objectionable. Nonetheless, even standards that rely on contextual analysis and subjective interpretation are a vast improvement on a rule that tests campaign intervention only "under all the facts and circumstances." Speech about candidates and the FEC experience As a starting point for grappling with communications that refer to candidates, a recently-completed Federal Election Commission rulemaking may prove fruitful. Unlike the IRS, the FEC has not been able to avoid court-imposed mandates to narrow and clarify the definition of political speech it seeks to regulate 9. In the latest such exercise, the FEC considered a safe harbor for issue advocacy in broadcast messages referring to a federal candidate within a narrow pre-election window (30 days before a primary and 60 days before a general election). Of course, the FEC administers a different law, one subject to different constitutional considerations. In regulating charities, the IRS is charged with protecting against misuse of public funds, provided as a tax subsidy when (c)(3)s receive taxdeductible contributions. Nonetheless, despite the two agencies' different mandates, the FEC's experience in trying to draw a bright-line definition of political campaign advocacy may prove instructive. In June 2007, the Supreme Court decided that the prohibition on using corporate or union funds for "electioneering communications" (the 30- or 60- day broadcast messages that refer to a clearly identified federal candidate) would be constitutionally supportable only if the message was susceptible of no reasonable interpretation other than a call to vote for or against a candidate 10. In response, the FEC revised its regulations to allow communications not covered by this standard. It also established a three-pronged safe harbor to define speech that would be conclusively presumed to fall outside the prohibition. The FEC decided it could safely treat any communication as falling outside the standard of "no other reasonable interpretation than a call to vote for or against a candidate" if it 11 : (1.) Does not mention any election, candidacy, a political party, opposing candidate, or voting by the general public. (2.) Does not take a position on any candidate's or officeholder's character, qualifications, or fitness for office. (3.) Focuses on a legislative, executive, or judicial matter or issue and (a) urges a candidate to take a particular position or action with respect to the matter or issue, or (b) urges the public to adopt a particular position and to contact the candidate with respect to the matter or issue. 8 The IRS itself has done this in very limited circumstances. See, e.g., Rev. Rul , Situation 14 (referring to a candidate and issue but not elections); Rev. Rul , CB 154 (voter education materials that refer to candidates in that capacity and issues). 9 Because (c)(3) status provides an effective subsidy of the organization, the degree of constitutional scrutiny applied to restrictions on political speech by such organizations is significantly lower than that which applies to non-(c)(3) organizations. Christian Echoes Nat'l Ministry, Inc., 31 AFTR 2d , 470 F2d 849, 73-1 USTC 9129 (CA-10, 1972). 10 FEC v. Wisconsin Right to Life, Inc., 168 L Ed 2d 329 (2007) C.F.R. section (b).

4 The Code's concept of campaign intervention is certainly broader than speech subject to no other reasonable interpretation than a call to vote for or against a candidate. One could not simply import this FEC safe harbor into the tax context and be confident that it will not shelter from enforcement any speech that ought not to be funded with tax-subsidized money. However, this attempt to define safely non-electoral speech may provide a starting point for drafting a (c)(3) safe harbor for speech that references current candidates. Due to the lower degree of constitutional scrutiny applied to Code restrictions on (c)(3) speech, the IRS generally considers a wider range of factors than the FEC. In looking at the third prong of the FEC safe harbor, tax analysis would likely add several other requirements. Most critically, the IRS attaches significance to the timing of the communication. A charity that distributes a statement comparing its position on legislation to that of an officeholder who is also a candidate for re-election will not necessarily be saved by including a call for the public to contact the lawmaker and urge adoption of the charity's position. If the issue in question is a high-profile and divisive one in the election, and if there is no external event such as a legislative vote that the charity is seeking to influence by making the statement at the time, the communication is likely to be found to be campaign intervention. Thus, an additional element might be tacked onto the FEC safe harbor the timing of the communication is driven by or tied to the attempt to influence an external event outside the control of the charity, such as a vote in a legislative committee. A statement by a candidate or position put forward by a campaign would not be included as such an external event. This addition may reach the beginnings of a safe harbor for speech that refers to candidates without, of course, identifying them as candidates. It does not cover every kind of speech that should be protected, by any means. Organizations might want to react to events that have occurred rather than influence future action, or bring their expertise to bear in commenting on and understanding a policy proposal put forward by a prominent candidate. Neither of these would be protected under this test, but each might be permissible depending on the facts and circumstances. Further refinements to the standard might help expand its reach without opening up a loophole that invites exploitation. Speech about elections and issues After speech about issues only, and issues and candidates, the next logical category is speech about issues and elections but not candidates. Such communications could have several goals. Section 501(c)(3) efforts may refer to issues in order to motivate voter participation. Alternatively, organizations finding it difficult to gain traction in the legislature because of a perception that their supporters do not vote, and so can be safely ignored, may seek to encourage like-minded voters to go to the polls. It is difficult to devise a rule of general applicability to govern this type of electoral messaging. Indeed, non-precedential statements by IRS officials indicate they might not be willing to concede that such issue-focused voter engagement efforts could ever be permissible for (c)(3)s. But for voter engagement activities that rely on issues solely to increase turnout and participation, it should be possible to craft some sort of rule. Voter engagement specialists know that getting people to register and then turn out is no easy task. Providing the necessary motivation to expend the effort involved is aided if voters see a connection between their participation in the electoral process and policies that have a direct impact on their lives. "Vote because it is your civic duty" is simply not an effective message. Of course, "Vote to make sure our schools teach science and not creationism" is quite likely to be perceived as veiled support for some school board candidates and opposition to others, assuming there has been a local controversy over the biology curriculum. "Your vote is necessary to help protect a woman's right to choose" is similarly problematic. But it must be possible to draw a clear line for messages that do not limit charities to only the bland and ineffective. Features of such a test could include:

5 (1.) Reference is made to several different issues. (2.) The issues are chosen because of their ability to connect the audience to the impact of decisions made by elected officials. (3.) The issues are framed neutrally, in language that does not betray the organization's position and does not suggest only one correct answer. (4.) The issues either do not include "wedge" issues that divide the candidates in any relevant campaign or, if "wedge" issues are mentioned, the communication is not targeted to an audience known to have a likely preference for one side of the issue. This suggestion focuses on the content of a voter involvement message. Voter registration and getout-the-vote activities may also be improper if they are targeted based on criteria that indicate a likely candidate or partisan preference. Setting such concerns aside, however, a rule allowing voter involvement communications that meet this standard would not be opening any sort of door for abuse, and should be an acceptable safe harbor for this type of speech. All together now Communications referring to candidates or parties, issues, and elections or voting are perhaps the most challenging to describe in a safe harbor test. Of course, existing guidance addresses just this category of speech in decades-old rulings on voter education 12. The voter guides permitted to (c)(3)s of necessity convey information about candidates and issues without being deemed campaign intervention. Unfortunately, the available 30-year old rulings are not very useful for charities that seek to expand beyond the bounds of traditional voter education. As election seasons and the attendant public focus on policy issues expand to consume an everlonger portion of the election cycle, many (c)(3)s are increasingly interested in using this public attention to accomplish charitable goals unrelated to electoral outcomes engaging the public around their issues, improving public understanding of the complexity of the issues the charity addresses, educating candidates about the public policy dimension of a given social problem, and seeking to move candidates to adopt the charity's position during the campaign when their positions may not have become entirely entrenched. It can be a sort of pre-lobbying of the future officer holder. Is it possible to describe charitable activities that seek to raise an issue within an electoral campaign in a way that provides a useful safe harbor and does not create a massive loophole, or are the old familiar "facts and circumstances" the only option? Here's a try. A message is not campaign intervention by virtue of its content if: (1.) It either (a) asks all candidates to take a position on an issue, or (b) asks the public to encourage candidates to take a position. (2.) The issue is framed neutrally, in language that does not betray the organization's position on the issue and does not suggest only one correct answer. (3.) The issue is not a "wedge" issue known to distinguish the candidates in any relevant campaign. (4.) The communication is not targeted based on criteria that indicate a likely candidate or partisan preference. Under prong 1, the candidates would not be asked to adopt a specific position (that of the organization), but to go on the record and articulate what their position is. Such a standard, if promulgated, could provide significant comfort to charities seeking to engage candidates around issues. 12 E.g., Rev. Rul

6 Why the IRS should care Advocates of an IRS bright line or safe harbor do not express much confidence that the Service will respond to their suggestions unless it is forced to take action. This is unfortunate for the charitable community, but also potentially a risky position for the IRS. When pressed about frustrations over the vague yet restrictive position the IRS takes on (c)(3) electoral activity and the lack of adequate guidance, its standard response is that no one has a right to use tax-preferred dollars in connection with elections, and organizations concerned about their (c)(3) status can always create a (c)(4) to engage in activities denied to (c)(3)s 13. This answer is insufficient. The fuzzy and ill-defined line that delineates what is off-limits for (c)(3)s also serves to define what a (c)(4) may not have as its primary activity, and the same activity that a 527 must primarily engage in. Without further guidance on this standard, pressure will almost certainly grow from the (c)(4)/527 side of the equation. The difference in tax benefits for a (c)(4) that engages in some political activity and a 527 is virtually nil (although there is a significant difference in disclosure requirements). The (c)(4) is taxed on investment income only to the extent of its political activity, while contributions to the 527 enjoy exemption from gift tax. But there is no significant "subsidy" as with (c)(3)s. An organization may be perfectly willing to comply with whatever legal requirements apply, but it needs to know whether it is a (c)(4) or a 527. That is, it must know whether or not its primary activity falls into the area off-limits to (c)(3)s. Here it is easier to see the constitutional dimension to a challenge a group of citizens exercising their First Amendment right to freedom of assembly have come together to exercise their First Amendment right to speak freely. They are willing to file any necessary papers and make any required disclosures, but because of the vagueness of the Service's definition of campaign intervention, they cannot be certain which set of rules applies to their group, that governing a (c)(4) or that for a 527. It is hard to imagine that the Service's steadfast refusal to draw clear lines could withstand constitutional challenge from such a group. To date, the IRS has managed to avoid any such definitive litigation show-down, working out a settlement with the Christian Coalition just when it seemed that a court would finally have a chance to weigh in on the question 14. But this is not likely to continue forever. The latest IRS workplan suggests an increased interest in enforcement in the area of (c)(4) political activity 15. If this plays out in the same way as the Political Activity Compliance Initiative, sooner or later a targeted (c)(4) will decide to fight it out in court. When that happens, it is possible that the entire "facts and circumstances" determination of political campaign intervention will fall. Conclusion After years of discontent with the vagueness of facts and circumstances, the conversation around a possible bright-line standard is starting to crystallize. The suggestions posited above are presented 13 See Freda, "New FEC Rule Raises Questions Regarding Service's Fact-Based Political Activity Test," BNA Money & Politics Report 2/13/08, available at (reporting remarks of IRS Senior Technical Advisor Judy Kindell at a meeting of the Exempt Organizations Committee of the ABA's Tax Section on 1/17/08). 14 See IRS determination issued to The Christian Coalition International and related documents, reprinted in full in "IRS Approves 501(c)(4) Exemption for Christian Coalition International," 10 Paul Streckfus's EO Tax Journal at 48 (Sept/Oct 2005). 15 See FY 2008 EO Implementing Guidelines, available at ("In response to an increase in section 501(c)(4) activity in this area, we will conduct an outreach effort to educate 501(c)(4)s and the public on the specific rules applicable to 501(c)(4) political activity, and address allegations of wrongdoing regarding those rules.")

7 as beginning points for discussion, not a firm thesis to be promoted over all others. If there are objections that any of these safe harbors would allow speech that should not be permitted, they can be further refined. Or perhaps some could be broadened to safely permit even more speech. In any case, it is hoped that these thoughts will contribute to further practical discussion on this topic.