Alliance for Justice Briefing on Nonprofit
 Advocacy Under McCain-Feingold (S. 27)

Michael Trister and Holly Schadler
Lichtman, Trister, Singer and Ross

The Bipartisan Campaign Reform Act of 2001 (McCain-Feingold), passed by the Senate on April 2, 2001, will have a significant impact on the advocacy activities of tax-exempt organizations and the political action committees established by these organizations. The most widely discussed provisions of McCain-Feingold, relating to the use of soft money by national and state parties and the increase of hard money contribution limits, do not apply directly to tax exempt organizations, but could indirectly affect the ability of these organizations to carry out advocacy activities. Other provisions of the bill directly affect tax-exempt organization advocacy activities.

Soft Money Restrictions. McCain-Feingold imposes an absolute ban on receipt of soft money by the national political parties, including the congressional campaign committees of the parties, and substantially restricts the use of soft money by state and local party committees. While it has been suggested that the elimination of soft money contributions to the national parties will make available a large pool of new donations for tax-exempt organizations, this may depend upon whether the parties are able to structure new soft money 527 organizations of their own to receive the money previously contributed directly to the parties. While nominally independent of the parties, these entities would be expected to spend their funds in ways that are consistent with the overall goals of the parties.

Another factor that could inhibit the transfer of party soft-money to existing organizations exempt under section 501(c)(4) is the potential application of the federal gift tax to contributions in excess of $10,000 per year ($20,000 per couple), a steep tax that does not currently apply to contributions to party committees.

The restrictions on state party use of soft money in connection with federal elections may also have an indirect impact on the advocacy activities of exempt organizations in those states that, unlike federal law, permit corporate contributions to candidates and parties in connection with state elections. By requiring state parties to use hard money for a broad range of election activities whenever there is a federal candidate on the ballot, McCain-Feingold would limit the ability of exempt organizations to use soft money contributions to support state party activities such as voter registration, voter identification, GOTV, bumper stickers, flyers, and general issue advertisements.

Increased Hard Money Limits. McCain-Feingold also raises some of the limits on "hard" money contributions to candidates and political parties. The current $1,000 per election limit on individual contributions to candidates would be raised to $2,000 and the annual limit on individual contributions to political parties would go from $20,000 to $25,000. Both of these limits would also now be increased to reflect changes in the consumer price index. While the current $5,000 limit on contributions to political action committees would not be increased, the cumulative annual limit on individual contributions to all federal candidates and political committees would be increased from $25,000 to $37,500 (and indexed for the first time), making it somewhat easier to raise hard money for exempt organizations’ PACs.

Electioneering Communications

Restrictions on Electioneering Communications. Among the most significant changes for the exempt community is the prohibition on so-called "electioneering communications" by corporations and the imposition of additional reporting requirements for such communications in the limited circumstances in which they remain permissible. Under McCain-Feingold as introduced in the Senate, corporations (and labor unions), other than those exempt under sections 501(c)(4) and 527 of the tax code, were prohibited outright from making electioneering communications. The legislation, as passed by the Senate, extends that ban to 501(c)(4) and 527 corporations if the electioneering communications are "targeted."

An electioneering communication is any broadcast, cable or satellite communication that refers to a clearly identified federal candidate and is made within 60 days of a general, special or runoff election or 30 days of a primary, convention or caucus, and is made to an audience that includes members of the electorate for the election. Independent expenditures are not considered electioneering communications and are, therefore, treated in another section of the bill. Whether the covered communications include only television and radio advertisements, or also include communications disseminated through the Internet, is not clear from the language of the bill.

Communications prohibited by this provision need not expressly advocate the election or defeat of a candidate, but simply "refer" to a candidate. Thus, a radio or television advertisement urging the public to contact "Senator X" to encourage him to vote in favor of an upcoming amendment to protect the environment could not be undertaken within the 60/30 day time periods by a 501(c)(3), an incorporated trade association or professional organization (or by a union). In the case of a presidential race with primaries and caucuses held almost continuously for several months and the party conventions following in the late summer, the ban could prohibit a covered organization from running any broadcast communications that make reference to a specific candidate for much of the election year.

Under the original bill, 501(c)(4) and 527 organizations that receive their funds directly from individuals were excluded from this general ban on corporate electioneering communications, although they were required to report their expenditures for such communications as explained below. However, the Wellstone Amendment, passed during the Senate debate, extends the ban on electioneering communications to include incorporated 501(c)(4) and 527 groups if the communications are "targeted." A communication is targeted if it is distributed from a television or radio broadcast station, cable or satellite service whose audience consists primarily of residents of the state for which the clearly identified candidate is seeking office. Therefore, incorporated 501(c)(4) and 527 organizations are now subject to the ban unless their communications are directed primarily to residents outside the state in which the identified candidate is running.

Since unincorporated entities were not prohibited from making electioneering communications under the original version of the bill, it is uncertain whether the Wellstone amendment will have any effect on the activities of such organizations. However, if they are permitted to conduct electioneering communications they would be subject to the reporting requirements discussed below.

The bill anticipates an inevitable challenge on First Amendment grounds. In the event of a successful challenge to the scope of activities covered under this section on "electioneering communication," there is an alternative definition of the term that narrows to some extent the types of prohibited communications to include broadcast, cable or satellite communications which "promote or support" or "attack or oppose" a candidate for office and "which are suggestive of no plausible meaning other than an exhortation to vote for or against that candidate." The 30/60 day time periods are not included in this definition. Under this standard, a communication that simply refers to a candidate, without supporting or opposing the candidate, would fall outside the definition of electioneering communication. Thus, a nonprofit corporation could run an advertisement discussing a piece of legislation and encouraging the public to call "Senator X" to urge her to vote for the bill.

Reporting Electioneering Communications. A 501c)(4) or 527 organization that makes untargeted electioneering communications would be required to report within 24 hours any disbursements for these communications in an aggregate amount in excess of $10,000 during a calendar year. The report is filed with the FEC. The first report is due within 24 hours of making expenditures aggregating in excess of $10,000 and subsequent reports must be filed within 24 hours of making additional expenditures in the aggregate in excess of $10,000. Under this provision, 501(c)(4) organizations would be required for the first time to disclose donor information to the public.

These reports must provide: the name and address of the entity making the disbursement; the amount and recipient of each disbursement over $200 during the reporting period; the election to which the disbursement pertains and the name of the candidate(s) identified; and contributions of $1,000 or more to the entity making the disbursement. If the disbursement is made out of a separate account for electioneering communications that consists of funds contributed directly by individuals, the report must disclose the names and addresses of all contributors who contributed $1,000 or more to that account during the period from the first day of the preceding calendar year and ending on the disclosure date. If the expenditures are not made from a segregated account, the names and addresses of all contributors who contributed an aggregate of $1,000 or more to the organization during the preceding calendar year through the disclosure date must be reported. This disclosure is in addition to any other reporting requirements, including those recently imposed on 527 organizations.

Coordination with Candidates and Political Parties

Background. In Buckley v. Valeo, the Supreme Court held unconstitutional any limitation on how much an individual or political committee may spend on expenditures made independently of a candidate. Expenditures made at the suggestion or request of a candidate, however, were excluded from this protection and treated as in-kind contributions subject to the statutory limitations and restrictions on other forms of contributions. As a result, nonprofit organizations that make so-called coordinated expenditures violate the Federal Election Campaign Act’s ("FECA") absolute prohibition on corporate contributions; similarly, individuals and political action committees will violate FECA if the cost of their coordinated expenditures, when aggregated with other contributions made by the individual or committee, exceed the statutory contribution limits.

In the years since Buckley announced this coordination rule, there has been great uncertainty about two questions: First, what kinds of expenditures will become in-kind contributions when they are coordinated with candidates; specifically, does a communication have to contain express advocacy in order to result in an in-kind contribution when it is coordinated with a candidate and, if not, what must a communication include before it may be subject to the coordination rule? Second, what kinds of contacts with a candidate will constitute coordination? In its enforcement actions, the General Counsel’s office at the FEC took a very broad view of both questions, seeking to apply the coordination rule to any expenditure that has some value to a candidate, even if it was for a communication that does not contain express advocacy, and seeking to prove the existence of coordination on the basis of fairly minimal contacts between the nonprofit organization and candidates or their agents.

In FEC v. Christian Coalition, a federal district court refused to limit the kinds of expenditures that are subject to the coordination rule, but held that the definition of coordination must be a very narrow one in order not to deter citizens from communicating with their representatives on important matters of public policy. The FEC then issued new regulations, which are about to take effect, defining general public political communications communicated, that a majority of the Commission believes comport with the Christian Coalition decision.

Coordination Under McCain-Feingold. As introduced, McCain-Feingold would have repealed the FEC’s regulations and replaced them with a detailed definition of coordination broadly applicable to anything of value expended by individuals, organizations and committees. In response to objections from a wide range of persons who feared, amongst other things, that the bill would restrict legitimate coordination with Members of Congress about legislative matters, the Senate adopted a compromise amendment offered by Senator McCain which dropped the original language and replaced it with a very general provision addressing the issue of coordinated expenditures.

Under the Senate-passed bill, the statutory definition of "contribution" would be amended to include "any coordinated expenditure or other disbursement made by any person in connection with a candidate’s election, regardless of whether the expenditure or disbursement is for a communication that contains express advocacy" and "any expenditure or other disbursement made in connection with a national committee, State committee, or other political committee of a political party by a person ... in connection with an election, regardless of whether the expenditure or disbursement is for a communication that contains express advocacy." For purposes of these provisions, the term "coordinated expenditure or other disbursement" would be defined to mean:

a payment made in concert or cooperation with, at the request or suggestion of, or pursuant to any general or particular understanding with, such candidate, the candidate’s authorized political committee, or their agents, or a political party committee or its agents.

The bill directs the FEC to promulgate new regulations to enforce this statutory standard within 90 days of the effective date of the Act, and further directs that this regulation (i) shall not require collaboration or agreement to establish coordination; and (ii) should address certain factors, including the use of common vendors, the involvement of individuals who previously served as employees of a candidate or a political party, the effect of "substantial discussion" about a communication, and the impact of permissible coordination of membership communications on subsequent communications made to nonmembers.

The effect of this revised language on the lobbying and campaign-related activities of nonprofits is far from clear and will depend ultimately on how the new provision is interpreted by the FEC when it attempts to comply with the mandate to issue new coordination regulations. At the least, the Senate-passed bill introduces uncertainty into an area of regulation that had only recently begun to achieve some measure of clarity, to the detriment of the FEC’s enforcement efforts and voluntary compliance by the regulated community.

For example, it is unclear when an expenditure or other disbursement will be found to be made "in connection with" a candidate’s election. This phrase has been interpreted by the Supreme Court to mean that a communication must contain express advocacy, but the bill explicitly rejects this construction; there is therefore no standard as to what types of expenditures and disbursements will be subject to the coordination prohibition. Does the new standard include only communications that identify a specific candidate by name, as under the current FEC regulation, or does it include any communication made in close proximity to an election, or are there other factors that come into play?

The bill’s new definition of coordination also raises questions, particularly insofar as it includes any expenditure or disbursement made "pursuant to any general or particular understanding" with a candidate. One of the important aspects of the decision in the Christian Coalition case was the court’s insistence that an organization’s contacts with a candidate had to be about a specific communication before it could be treated as a coordinated expenditure. The new language suggests that a broader test may be required, one that would include any situation in which a group receives information about a candidate’s plans or talks generally with a candidate about the campaign, including, perhaps, an organization’s contacts with a candidate in the course of deciding which candidate to endorse.

McCain-Feingold will have a significant impact on the ability of federally registered political action committees of exempt organizations and 501(c)(4) organizations that qualify under the so-called MCFL exception to make independent expenditures – communications, not subject to contribution limits, that expressly advocate the election or defeat of clearly identified candidates. The bill significantly narrows the communications that will qualify as independent expenditures and imposes new reporting requirements on entities undertaking these activities.

The revised definition of coordination discussed above will apply to independent expenditures paid for by PACs and MCFL corporations, thus limiting the ability of these entities to conduct such activities. In addition, the bill prohibits coordination not only with candidates and their agents, but with any other person who has engaged in coordinated activity with a candidate or a candidate’s agent. The adoption of this imputed coordination rule could require PACs and MCFLs to take steps to ensure themselves that other entities or individuals with whom they interact on legislative and political matters have not engaged in prohibited coordination or risk having their own expenditures treated as prohibited contributions.

New Reporting Requirements. Independent expenditures made (or contracted for) anytime up to and including the 20^th day before an election that aggregate $10,000 or more, would have to be reported within 48 hours after the expenditure is made or the contract entered. Subsequent reports would have to be filed within 48 hours after $10,000 or more in additional expenditures with respect to the same election were made or contracted. Under current law, there is no special reporting of these early independent expenditures, which are instead reported at the same time an entity files its regular monthly or quarterly FEC reports.

Availability of Broadcast Time. The bill includes several provisions that could reduce the availability of broadcast time close to an election for advocacy communications by exempt organizations. Broadcast stations and cable and satellite providers are required under certain circumstances to sell to candidates and national political parties at lowest unit rates and are prohibited from preempting the use of this time in favor of another advertiser. These provisions are intended to address, among other things, concerns by candidates that their campaign advertisements were being preempted or moved to less popular viewing times, in order to accommodate higher priced commercial advertising. The potential effect of these provisions could be to make it even more difficult for exempt organizations to buy advertising for their advocacy work close to election time.

Broadcast Identification. Certain entities would be subject to additional disclosure on television, radio, newspaper, and general public political or electioneering communications. These communications must state the name of the group that pays for the ad as well as the street address and telephone number or World Wide Web address. This identifying information must be readable, presented in a printed box set apart from the other contents of the communication and printed with a reasonable degree of color contrast between the background and the printed materials. In addition, radio and television broadcasts must include in a clearly spoken manner the following statement: "__________is responsible for the content of this advertising." If the broadcast is aired on television, the statement must appear for at least 4 seconds.

In addition, broadcasters will be required to maintain for public review, extensive records on any group that requests to purchase time to advertise a message that relates to a candidate, a federal election or a "national legislative issue of public importance."

Although the soft-money restrictions of McCain-Feingold are aimed at the national and state political parties, there are several provisions that could have an impact on the ability of tax-exempt organizations, including charities, to raise funds.

Contributions from Parties. A national, state or local party committee, or any entity established, financed or controlled by a party committee, or any officer or agent acting on behalf of a party committee, may not solicit funds for or contribute or direct contributions to any 501(c) or 527 organization. In the past, some nonprofits have received support from the parties for voter registration, candidate forums, and other nonpartisan activities. This type of fundraising would be prohibited. The new prohibition may also prove to be a trap for an organization that receives contributions from private sources that unknowingly have been "directed" to the organization by unwary party officials.

Candidate and Officeholder Solicitations. Candidates, federal officeholders or any agent of those individuals may not solicit, receive, direct or transfer funds "in connection with a federal election, including funds for any federal election activity" unless the funds are subject to the limits, prohibitions and reporting requirements of the FECA. A similar prohibition applies to fundraising, transfers or direction of funds in connection with any election other that an election for federal office unless the funds are from individuals or federal PACS and are not in excess of the federal contribution limits.

While the bill does not define "in connection with a federal election," it defines "federal election activity" and sets out types of activities that would be covered under this provision. Specifically, candidates and Federal officeholders (and their agents) may not raise or direct funds to outside organizations, except subject to dollar limits and source restrictions, for voter registration activities conducted within 120 days of an election; voter identification, GOTV, or generic campaign activity conducted in connection with a federal election; or public communications that refer to a clearly identified candidate for federal office and that promote or support, attack or oppose that candidate. Other activities that are specifically excluded from federal election activity are: communications that refer exclusively to a clearly identified state or local candidate, contributions to state or local candidates, and the costs of a state or local political convention.

April 13, 2001