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MEMORANDUMTO: Lobbying Group/Charity StaffsFROM: Alan P. DyeDATE: June 2, 2003RE: Distinctions between Section 501(c)(3) and Section 501 (c)(4) Organizations/

Do’s and Don’ts for Lobbying Group and Charity Activity in an Election Year

Lobbying Group is exempt from tax under section 501(c)(4) of the Internal Revenue Code, and Charity isexempt from tax under Code section 501(c)(3). Both organizations are corporations. The Code places strictlimitations on lobbying and political activities by section 501(c)(3) organizations and less strict limitations on suchactivities by section 501(c)(4) organizations. In addition, the Federal Election Campaign Act of 1971 (FECA), theBipartisan Campaign Reform Act of 2002 (BCRA) and many state election laws limit electoral activity bycorporations.Federal Election LawBoth Lobbying Group and Charity are subject to the FECA/BCRA rules. This means that neitherorganization may make a contribution to any federal political committee and that neither organization may expendfunds to expressly advocate the election or defeat of clearly identified candidates.Contributions to political committees and candidates include both outright contributions and contributionsin-kind, and an expenditure may be a contribution in-kind to a candidate if the expenditure is coordinated with thecandidate or someone acting for the candidate. It is important for staff of both Lobbying Group and Charity not toconsult with any political entity concerning an expenditure of funds by Lobbying Group or Charity that mightbenefit that entity or candidate. Because innocent contacts with candidates or representatives of candidates orcommittees may give the appearance of coordination, when Lobbying Group or Charity makes an expenditure whichmay benefit a political candidate or committee, contact with that candidate or committee should be avoided. If contact with the candidate or committee is unavoidable, Lobbying Group staff should record the content of thecontact so that it can be proven, if necessary, that the contact did not involve coordination of any expenditure withthe candidate or committee.It is also necessary to avoid expressly advocating the election or defeat of clearly identified candidates.Fortunately, the courts have drawn a reasonably bright line in this area. Unless a communication contains words of

express advocacy, such as, “vote for”, “vote against”, “elect”, “defeat”, “support” or “oppose” the courts have held

the communication not to expressly advocate the election or defeat of a candidate, even though the communicationmay strongly reflect a view with respect to named candidates. As will be discussed below, however, manycommunications that the FEC and the courts would not consider express advocacy would be considered campaignintervention by the Internal Revenue Service, with serious negative effects for Lobbying Group or Charity.BCRA, passed in 2002, and currently on appeal in the U.S. Supreme Court, also regulates certaincommunications by Lobbying Group and Charity. BCRA bars the use of corporate treasury money for

“electioneering communications.” BCRA’s main definition, which is in effect during the appeal, defines“electioneering communication” as any broadcast, cable, or satellite communicat

ion which refers to a clearlyidentified candidate for Federal office, and is made within 60 days before a general election or 30 days before aprimary election. In the case of a communication which refers to a candidate for office other than President or VicePresident, the communication must also be targeted to the relevant electorate.

Under BCRA, Lobbying Group is permitted to make electioneering communications as long as it usesindividual money and makes the required disclosures. (If Lobbying Group derives income from business activitiesor accepts contributions from corporations or unions, it must pay for electioneering communications from a separateaccount to which only individuals can contribute). Lobbying Groups receiving contributions or makingexpenditures of $1,000 for electioneering communications must register with the FEC as a PAC within 10 days.BCRA extends the prohibition on corporate funds being used in connection with a federal election to coverelectioneering communications. But, the FEC Regulations provide an exception to the prohibition on electioneeringcommunications for communications by Charity because § 501(c)(3) organizations are prohibited under the InternalRevenue Code from intervening in political campaigns. Therefore, under BCRA, Charity can, in effect, makecommunications that might otherwise be deemed to be electioneering communications merely because they mentiona Federal officeholder.As to Lobbying Group, BCRA provides an exception to certain types of Lobbying Groups from therequirement that corporations use separately segregated funds, and not general treasury funds, to pay forelectioneering communications. BCRA permits Lobbying Group to use its general treasury funds to pay forelectioneering communications

if

it is incorporated under § 501(c)(4) of the Internal Revenue Code. While thisexception permits such communications, Lobbying Group may not use funds donated by a corporation, but mayonly use funds donated by individuals to pay for electioneering communications. Lobbying Group is not exemptfrom the disclosure requirements.While BCRA contains this exception, there is an additional condition which effectively eviscerates theexception. BCRA also states that the exception for Lobbying Group is inapp

licable “in the case of a targetedcommunication.” A “targeted communication” is an electioneering communication that is distributed via television,

radio, cable or satellite and, in the case of a communication which refers to a candidate for an office other thanPresident or Vice President, is targeted to the relevant electorate. The direct consequence is that Lobbying Group isnot permitted to use its general treasury funds for electioneering communications. Therefore, Lobbying Groupcannot make electioneering communications without first establishing a separate segregated fund (PAC).BCRA generally permits Federal officeholders and candidates from soliciting or directing nonfederal funds(soft money) for Charity and Lobbying Group, subject to certain restrictions. A Federal officeholder or candidate

may solicit unlimited funds for Charity and Lobbying Group if their “principal purpose” is not to conduct activities

such as voter registration, voter identification, or get-out-the-vote activity, so long as the solicitation does notspecify how the funds will be spent. Additionally, an officeholder or candidate may solicit up to $20,000 per personper year specifically for voter registration, voter identification, or get-out-the-vote activity, or for a Charity or

Lobbying Group whose “principal purpose” is to conduct any or all of those activities.

Tax StatusCharityAs a section 501(c)(3) organization, Charity is subject to the most stringent IRS rules governing lobbyingand political activity. In order to continue to qualify, Charity must be exclusively devoted to educational, charitable,scientific and religious activity, or some combination of such activities. It may not engage, as a substantial part of itsactivity, in activity intended to influence legislation, and it may engage in no activity whatever which the IRS wouldfind to constitute direct or indirect participation in any campaign for public office, so -

called “campaignintervention”.

Charity has made an election under section 501(h) of the Internal Revenue Code. That means that it will notbe considered to have engaged in lobbying communications unless it makes communications directed to members of Congress or their staffs (or executive branch officials involved in the promulgation of legislation), whichcommunications refer to specific legislation and reflect a view on that legislation. Charity may communicate withmembers of Congress on a general legislative subject (without referring to specific legislation) and take a positionwith respect to that subject. Alternatively, Charity may communicate with respect to specific legislation, so long asthe communication is balanced and does not reflect a view with respect to that legislation. Neither type of communication would be considered a lobbying communication. If, however, Charity communicates with a member

of Congress or congressional staff (or an executive branch official involved in the promulgation of legislation),refers in the communication to specific legislation, and

“reflects a view” on that legislation, then the communication

will be considered a direct lobbying communication.Direct lobbying communications are not forbidden, but are subject to specific limitations, calculated as a

percentage of the organization’s budget. Charity

management has determined that it will not intentionally engage inany such communications, but will instead make any such communications through Lobbying Group.The statute also limits grassroots lobbying communications. A grassroots lobbying communication is acommunication addressed to members of the general public (rather than a legislator or staff), which communicationrefers to specific legislation, reflects a view on that legislation, and contains a call to action, such as an admonitionto the reader to contact a legislator with respect to the legislation. Thus communications to the public which refer tospecific legislation and take a position on the legislation will not be considered lobbying communications unlessthey also contain a call to action. Likewise, communications which refer to a general legislative subject matter (butnot to specific legislation) and which take a position with respect to that subject matter and ask the reader to contacta legislator will not be considered lobbying communications because they do not refer to specific legislation. Only acommunication which has all three of the required elements - (1) a reference to specific legislation, (2) editorialmaterial reflecting a view on that legislation, and (3) a call to action - will be considered a grassroots lobbyingcommunication. Charity management has determined that no such communications will be made by Charity and thatany such communications will instead be made by Lobbying Group.Charity may engage in absolutely no campaign intervention. Generally, campaign intervention wouldinclude publishing or distributing statements on behalf of or in opposition to candidates, but it also may includemuch more subtle activity. As a general matter an activity will not be considered campaign intervention if it isneutral vis-a-vis candidates. Accordingly, the publication of neutral voter guides, the sponsorship of non-partisancandidate debates and public forums to which a wide selection of candidates are invited, non-partisan voter

registration activities, and the distribution of voting records (without indicating which votes are “correct”) will not

be considered campaign intervention.Advertising which reflects negatively on a candidate may be considered campaign intervention. Thedistribution of voter guides containing the answers to biased questions or the answers to questions on only a narrowrange of issues may be considered campaign intervention. The registration of voters who have been pre-identified asRepublicans or Democrats would be considered political. The conduct of debates and forums to which a wide crosssections of candidates have not been invited would be questionable. In general, the touchstone is neutrality, and anyactivity which would benefit one candidate over another is suspect.Lobbying GroupUnlike Charity, Lobbying Group has no limitation upon its lobbying activities. Therefore it may engage inunlimited direct and grassroots lobbying communications.Lobbying Group could technically lose its tax-exempt status under section 501(c)(4) if its primary activityis campaign intervention. Since by far the majority of Lobbying Group activity is lobbying and education, however,this is probably not a matter of real concern.Campaign intervention is a matter of concern to Lobbying Group, however, because of section 527(f) of theInternal Revenue Code, which imposes a tax upon campaign intervention expenditures by section 501(c)(4)organizations. Lobbying Group expenditures for campaign intervention would be subject to a 35% tax, andcampaign intervention activity by Lobbying Group, though probably not destructive to its exemption, should beapproved by management.Specific

Questions and Do’s and Don’ts

1. If Charity materials on issues are passed out at political events, no questions are asked of candidatesappearing at the events, and no other activity which could be deemed political is undertaken by Charityrepresentatives, can Charity money be used to pay the expenses of such an effort?

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