MEMORANDUM

TO: FROM: DATE: RE:

Lobbying Group/Charity Staffs Alan P. Dye June 2, 2003 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 is exempt from tax under Code section 501(c)(3). Both organizations are corporations. The Code places strict limitations on lobbying and political activities by section 501(c)(3) organizations and less strict limitations on such activities by section 501(c)(4) organizations. In addition, the Federal Election Campaign Act of 1971 (FECA), the Bipartisan Campaign Reform Act of 2002 (BCRA) and many state election laws limit electoral activity by corporations. Federal Election Law

Both Lobbying Group and Charity are subject to the FECA/BCRA rules. This means that neither organization may make a contribution to any federal political committee and that neither organization may expend funds to expressly advocate the election or defeat of clearly identified candidates. Contributions to political committees and candidates include both outright contributions and contributions in-kind, and an expenditure may be a contribution in-kind to a candidate if the expenditure is coordinated with the candidate or someone acting for the candidate. It is important for staff of both Lobbying Group and Charity not to consult with any political entity concerning an expenditure of funds by Lobbying Group or Charity that might benefit that entity or candidate. Because innocent contacts with candidates or representatives of candidates or committees may give the appearance of coordination, when Lobbying Group or Charity makes an expenditure which may 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 the contact so that it can be proven, if necessary, that the contact did not involve coordination of any expenditure with the 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 communication may strongly reflect a view with respect to named candidates. As will be discussed below, however, many communications that the FEC and the courts would not consider express advocacy would be considered campaign intervention 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 certain communications 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 communication which refers to a clearly identified candidate for Federal office, and is made within 60 days before a general election or 30 days before a primary election. In the case of a communication which refers to a candidate for office other than President or Vice President, the communication must also be targeted to the relevant electorate.

Under BCRA, Lobbying Group is permitted to make electioneering communications as long as it uses individual money and makes the required disclosures. (If Lobbying Group derives income from business activities or accepts contributions from corporations or unions, it must pay for electioneering communications from a separate account to which only individuals can contribute). Lobbying Groups receiving contributions or making expenditures 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 cover electioneering communications. But, the FEC Regulations provide an exception to the prohibition on electioneering communications for communications by Charity because § 501(c)(3) organizations are prohibited under the Internal Revenue Code from intervening in political campaigns. Therefore, under BCRA, Charity can, in effect, make communications that might otherwise be deemed to be electioneering communications merely because they mention a Federal officeholder. As to Lobbying Group, BCRA provides an exception to certain types of Lobbying Groups from the requirement that corporations use separately segregated funds, and not general treasury funds, to pay for electioneering communications. BCRA permits Lobbying Group to use its general treasury funds to pay for electioneering communications if it is incorporated under § 501(c)(4) of the Internal Revenue Code. While this exception permits such communications, Lobbying Group may not use funds donated by a corporation, but may only use funds donated by individuals to pay for electioneering communications. Lobbying Group is not exempt from the disclosure requirements. While BCRA contains this exception, there is an additional condition which effectively eviscerates the exception. BCRA also states that the exception for Lobbying Group is inapplicable “in the case of a targeted communication.” 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 than President or Vice President, is targeted to the relevant electorate. The direct consequence is that Lobbying Group is not permitted to use its general treasury funds for electioneering communications. Therefore, Lobbying Group cannot 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 not specify how the funds will be spent. Additionally, an officeholder or candidate may solicit up to $20,000 per person per 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 Status Charity As a section 501(c)(3) organization, Charity is subject to the most stringent IRS rules governing lobbying and 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 its activity, in activity intended to influence legislation, and it may engage in no activity whatever which the IRS would find to constitute direct or indirect participation in any campaign for public office, so -called “campaign intervention”. Charity has made an election under section 501(h) of the Internal Revenue Code. That means that it will not be 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), which communications refer to specific legislation and reflect a view on that legislation. Charity may communicate with members of Congress on a general legislative subject (without referring to specific legislation) and take a position with respect to that subject. Alternatively, Charity may communicate with respect to specific legislation, so long as the 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 in any such communications, but will instead make any such communications through Lobbying Group. The statute also limits grassroots lobbying communications. A grassroots lobbying communication is a communication addressed to members of the general public (rather than a legislator or staff), which communication refers to specific legislation, reflects a view on that legislation, and contains a call to action, such as an admonition to the reader to contact a legislator with respect to the legislation. Thus communications to the public which refer to specific legislation and take a position on the legislation will not be considered lobbying communications unless they also contain a call to action. Likewise, communications which refer to a general legislative subject matter (but not to specific legislation) and which take a position with respect to that subject matter and ask the reader to contact a legislator will not be considered lobbying communications because they do not refer to specific legislation. Only a communication which has all three of the required elements - (1) a reference to specific legislation, (2) editorial material reflecting a view on that legislation, and (3) a call to action - will be considered a grassroots lobbying communication. Charity management has determined that no such communications will be made by Charity and that any such communications will instead be made by Lobbying Group. Charity may engage in absolutely no campaign intervention. Generally, campaign intervention would include publishing or distributing statements on behalf of or in opposition to candidates, but it also may include much more subtle activity. As a general matter an activity will not be considered campaign intervention if it is neutral vis-a-vis candidates. Accordingly, the publication of neutral voter guides, the sponsorship of non-partisan candidate 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. The distribution of voter guides containing the answers to biased questions or the answers to questions on only a narrow range of issues may be considered campaign intervention. The registration of voters who have been pre-identified as Republicans or Democrats would be considered political. The conduct of debates and forums to which a wide cross sections of candidates have not been invited would be questionable. In general, the touchstone is neutrality, and any activity which would benefit one candidate over another is suspect. Lobbying Group Unlike Charity, Lobbying Group has no limitation upon its lobbying activities. Therefore it may engage in unlimited direct and grassroots lobbying communications. Lobbying Group could technically lose its tax-exempt status under section 501(c)(4) if its primary activity is 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 the Internal 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, and campaign intervention activity by Lobbying Group, though probably not destructive to its exemption, should be approved 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 candidates appearing at the events, and no other activity which could be deemed political is undertaken by Charity representatives, can Charity money be used to pay the expenses of such an effort?

Yes. It is appropriate for a 501(c)(3) organization to distribute its educational materials to policy makers and other interested persons at political events, so long as this is being done to get out the organization message and not to assist any candidate. 2. Is it appropriate to distribute foundation materials at a political event where candidates at the event are asked where they stand on issues? May Charity funds be used to pay the expenses of such an effort? If information is distributed which takes a position on issues and, at the same time, candidates are asked where they stand on those issues, voters in attendance at these events who read the educational materials and hear the candidates answer may be influenced. Accordingly, it is not a good idea to combine inquiries with respect to a candidate’s positions with the distribution of educational information taking positions on the same issues. If the information distributed and the inquiries of the candidates are unrelated, the activity is probably acceptable. Likewise, if the materials distributed are neutral with respect to the issues discussed, inquiring of the candidates is acceptable. Only if the educational information distributed takes positions on the same issues about which the candidates are asked to take positions would there appear to be a problem. In these cases we would recommend against Charity funding of the activity. 3. If Lobbying Group or Charity invites Lobbying Group supporters to an event at which elected officials will be informed of the discomfort that the enaction of a state income tax will cause the citizens of a state, may section 501(c)(3) funds be used? Generally, yes, so long as no specific legislation is discussed and the circumstances do not suggest that Charity activities will influence the election. 4. Is it appropriate for Charity to submit a tort pledge to two candidates seeking election to Congress, where Charity believes that one candidate would sign the pledge while the other candidate would not? The signing of a pledge is best left to Lobbying Group if it is intended to publicize the results. The publication of the identity of those who have agreed and not agreed to sign pledges on issues can influence an election and therefore should not be undertaken by a section 501(c)(3) organization. If done by a section 501(c)(4) organization, it could result in the imposition of the section 527(f) tax if the IRS determines the effect of the distribution was to influence an election. 5. May Lobbying Group publicize, up to the date of an election, which candidates signed the pledge and which did not? The distribution of such information, where differences exist between the candidates’ willingness to sign the pledge, could be considered by the IRS as campaign intervention. It may be undertaken by Lobbying Group, so long it is not coordinated with the candidates, but it could result in the imposition of the 527(f) tax. 6. May Charity personnel take part in radio interviews talking about the need for personal retirement accounts, without citing positions of any presidential candidates? Yes. 7. If a Charity employee takes part in a radio interview with respect to personal retirement accounts, and a caller asks a question about one of the candidates’ plan for such retirement accounts, to what extent may the Charity employee answer the question? Charity employees should refrain from discussing a candidate’s positions on an issue where in the same program, the Charity employee has taken a position with respect to that issue. 8. May Charity sponsor a televised debate for all Republican candidates for governor? Yes, so long as the debate is conducted in an evenhanded way and so long as no person representing

Charity suggests a favorable or unfavorable view of any candidate. 9. If Charity creates a voter guide outlining responses by candidates for governor and state senator to five or six policy questions, may such guide be handed out at Charity events? If the voter guide covers a wide variety of issues, phrases the issues in an unbiased way, and gives all viable candidates an opportunity to respond, the guide should meet the requirements Revenue Ruling 78-248 and may be distributed by Charity. No Charity voter guide should contain any editorial material with respect to the issues about which the candidates are asked. For the same reason, voter guides showing candidates positions on issues should not be distributed at events where Charity or Lobbying Group has taken a position with respect to any of the issues about which the candidates are asked. The combination of editorializing about issues and identifying candidate’s positions on issues could be considered campaign intervention. 10. May Charity release a survey demonstrating the economic impact of the income tax on a state’s consumers and businesses, without mentioning a particular candidate’s plans? Yes. 11. May the same type of survey specifically show how certain income tax proposals would affect the state’s economy? Yes. 12. Is a newspaper ad which mentions specific legislation a grassroots lobbying communication if it does not contain a “call to action,” e.g., “call your Congressmen” or other similar phrase? No. The newspaper ad must contain all of the elements of a grassroots lobbying communication before it is deemed to be a grassroots lobbying communication by the IRS. 13. If such a newspaper ad mentioned the Senator sponsoring the specific legislation and was printed less than 60 days before a general Federal election, may either Charity or Lobbying Group pay for the ad? Under BCRA, either Charity or Lobbying Group may pay for the ad. The “electioneering communication” provision of BCRA only applies to broadcast, cable or satellite communications. 15. If Lobbying Group accepts contributions from other incorporated non-profits, may it pay for a television ad which urges viewers to contact a certain U.S. Senator and urge him to vote against a bill? May Charity pay for the ad? Lobbying Group may not pay for the ad if it will air 30 days before a primary election or 60 days before a general election. Charity may pay for the ad so long as the ad is not political intervention and does not otherwise cause Charity to exceed its § 501(h) election limit. 16. Charity places in the newspaper an editorial that asserts that lack of new capital is hurting the state economy. The article recommends that the state’s residents either invest more in local businesses or increase their savings so that funds will be available to others interested in making investments. The article is an attempt by Charity to influence opinions with respect to a general problem that might receive legislative attention and is distributed so as to reach and influence many people. However, the editorial does not refer to specific legislation that is pending, nor does it refer to a specific legislative proposal Charity either supports or opposes. Is this a grassroots lobbying communication? No. It does not contain a call to action nor does it refer to specific legislation. 17. What if the editorial refers to a bill pending in the state legislature that is intended to provide tax incentives for private savings. The editorial also praises the bill and recommends that it be enacted. Is the editorial a grassroots lobbying communication?

No. It does not contain a call to action. 18. Charity places an advertisement that specifically identifies and opposes a bill that it asserts would harm the farm economy. The advertisement is not a mass media communication (television, radio, billboards and general circulation newspaper and magazines) and does not directly encourage readers to take action with respect to the bill. However, the advertisement does state that Senator Y favors the legislation. Is the advertisement a grassroots lobbying communication? Yes, because the advertisement refers to and reflects a view on specific legislation, and also encourages the readers to take action with respect to the legislation by specifically identifying a legislator who opposes Charity’s views on the legislation. 19. Assume the advertisement in question 18 does not refer to Senator Y, but that it is a mass media communication aired within two weeks before a vote on the bill. Is the advertisement still grassroots lobbying? Yes, if the paid advertisement both reflects a view on the general subject of the legislation and either refers to the highly publicized legislation or encourages the public to communicate with legislators on the general subject of the legislation. Charity can rebut this presumption by demonstrating that the paid advertisement is a type of communication regularly made by the organization in the mass media without regard to the timing of legislation or that the timing of the paid advertisement was unrelated to the upcoming legislative action. 20. A Charity loans money to another for the purpose of assisting a petition to put an initiative on the ballot. Is this lobbying? Yes. An organization need not act through its own staff or members to engage in lobbying. It can be deemed to lobby if it does so through an agent or even if it lends money on favorable terms to another for the purpose of facilitating lobbying. 21. Charity has a research project to collect information for the purpose of showing the dangers of the use of pesticides in raising crops. The information collected includes data with respect to proposed legislation, pending before several state legislatures, which would ban the use of pesticides. The project publishes a communication which takes favorable positions on such legislation without producing a sufficiently full and fair exposition of the facts to enable the public to form an independent opinion or conclusion on the use of pesticides. Is this project within the grassroots lobbying exception for nonpartisan analysis, study or research? No, because it is designed to present information merely on one side of the controversy. 22. Charity plans to conduct a lobbying campaign with respect to illegal drug use and incurs $5,000 in expenses to conduct research and prepare a report primarily for use in the lobbying campaign. The report contains a full and fair exposition of the facts to enable the public to form an independent conclusion regarding the effect of the legislation discussed. Copies of the report are available at Charity’s office, but Charity does not actively distribute the report or seek to make the contents of the report available to the public. Is the report a grass roots lobbying communication? Yes. Charity undertook to produce the report for lobbying purposes and did not make a substantial distribution of the report prior to or contemporaneously with the use of the report in lobbying. 23. What if before using the report, Charity sends the research and report to universities and newspapers and also advertises the availability of the report in its newsletter. Such distribution is similar in scope to the normal distribution pattern of similar nonpartisan reports. Are the expenses for preparing the report considered to be for grassroots lobbying? No, because distribution of the report was substantial, and Charity’s primary purpose will be considered to be other than for use in lobbying.

24. Can a Charity place a disclaimer stating that the paid advertisement is for “educational purposes only” and thereby avoid having it construed as aiding or hindering the passage of any particular legislation? Such a disclaimer will not prevent a communication from being a grassroots lobbying communication if it otherwise meets the definition.

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