[EL] ELB News and Commentary 12/20/11

[BZall at aol.com]

It's no secret to many that my friend Ellen Aprill and I disagree on the  
extent to which tax subsidies can restrict First Amendment rights of speech 
and  association, but her analysis here is generally accurate. A couple of 
important  quibbles, however, and a response show some important issues not 
apparent on the  face of her necessarily brief summary of the field:
 
1) It is an overstatement to say that limits on nonprofit political speech  
are not from state "corporate law" but from "federal tax rules." Many of 
the  most significant restrictions on nonprofit political speech derive from 
both  state and federal campaign finance and other laws. It is, perhaps, more 
accurate  to say that an organization's status as "nonprofit" generally 
derives from state  law (hence the IRS simply "recognizes" a 501(c)(4)'s 
nonprofit and thus  generally non-taxable status as opposed to granting a 
501(c)(3)'s charitable  status: see, e.g., Form 1023 application for 501(c)(3) 
status vs. Form 1024  application to recognize other 501(c) status). The IRS then 
"recognizes" or  grants a nonprofit certain federal tax exemptions, based 
on the state-law  character of the organization. So a 501(c)(4) does have 
inherent rights to  status deriving from state "corporate law" which the 
federal government, through  the IRS, FEC or other agencies, may restrict or 
challenge. (And please note the  careful use of terms in this paragraph; I do not 
here mean to refute Brad  Smith's quite accurate analysis of the fact that 
the State does not "create"  that nonprofit corporation when it recognizes 
its character by registering it,  any more than the State "creates" my 
automobile by registering it and regulating  my use of it.) 
 
2) It is a common misconception that only the Blackmun/Brennan/Marshall  
concurrence in Regan discussed the concept of "sister organizations"  wherein 
a c3's speech rights could be limited only because it was able to set up  a 
c4 which could not be so limited without possibly offending the First  
Amendment. In fact, the main Rehnquist opinion also discussed that concept, and  
made the point that the IRS only required that the two organizations be  
separately incorporated and that sufficient records be maintained to show that  
tax-deductible contributions are not used to pay for lobbying. 461 U.S. at 
544,  and n. 6. In fact, footnote 6 in the main opinion is very much the 
same as the  Blackmun concurrence in this regard, if not so blunt in saying 
that if the IRS  does, in the future, restrict c4 speech, it would likely 
violate the First  Amendment. The net effect of this misconception is to somehow 
feel that the full  force of precedent is not behind that concept, leading, 
for example, to  Treasury's and the IRS's including other restrictions on 
sister organizations  beyond just separate incorporation and lobbying records. 
 
Thus, Ellen's conclusions that "the limits on lobbying matched the subsidy  
supplied by tax deductibility of contributions." and "it might seem that 
tax  exemption on any income earned by a section 501(c)(4) is a sufficient 
subsidy  under Regan to justify the limits on campaign intervention by section  
501(c)(4) organizations." might be seen in a somewhat different light from 
what  I assume she was suggesting by her further analysis. One might view 
the  Regan and Rent Control analyses as suggesting that the  government has 
only a minimal interest in this area, sufficient only to support  the least 
restrictive limits. Which, in turn, undercuts her proposal that the  ability 
to establish a PAC is sufficient to protect the government's interest,  in 
light of the Citizens United analysis about the burdens of  establishing a PAC 
not protecting the government's interest in regulating  corporate speech. 
 
3) So my response to her ultimate question to Eugene is what she probably  
expects from me (though she obviously wasn't asking me): in light of the  
Citizens United analysis of governmental interests sufficient to  overwhelm 
the First Amendment being limited solely to quid pro quo  corruption 
avoidance, no and no. It would appear that there needs to be  much more specific 
evidence of a real threat of corruption to do that, and  Doe v Reed and Phelps 
set the bar very high on specific  evidence. Simply citing tax exemption may 
not be enough, especially where c4s  are already taxed on such activities at 
whatever level Congress thought  appropriate. 
 
So I agree with Ellen about c4s not being free to engage in political  
speech, but believe there is a difference in terms between her and Eugene, and  
also quibble with her constitutional analysis. 
 
Barnaby Zall
Of Counsel
Weinberg, Jacobs & Tolani,  LLP
11300 Rockville Pike, Suite 1200
Rockville, MD 20852
301-231-6943  (direct dial)
_www.wjlaw.com_ (http://www.wj/) 
bzall at aol.com



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In a message dated 12/21/2011 8:26:38 P.M. Eastern Standard Time,  
ellen.aprill at lls.edu writes:

WARNING:  A LOT OF TAX RULES FOLLOW  


Just to get the current state of affairs on record in connection with D -   


The limits on political activities by nonprofits derive not from state  
corporate law, but from federal tax rules.  


The opinion of the court in Regan upheld lobbying limits on  501(c)(3) 
organizations on the grounds that the government was not required to  subsidize 
First Amendment activities and that both exemption and the ability  to 
accept tax-deductible contribution were subsidies.


Justice Blackmun concurred on the grounds that an alternate channel for  
lobbying was available - section 501(c)(3) organizations could form sister  
501(c)(4) organizations that could not accept tax-deductible contributions,  
but also were not subject to limits on lobbying.  Thus, the limits on  
lobbying matched the subsidy supplied by tax deductibility of contributions.  


Regan did not address limits on campaign intervention.  


While 501(c)(4)'s can lobbying without limit, they cannot, under IRS  
regulations, engage in campaign intervention as their primary activity.  (If such 
activity becomes the organization's primary activity, it would  meet the 
definition of a political organization under section 527.) There is  no 
official definition of what "primary activity" means, but at the very least  it 
means that activities other than campaign intervention must be at least 51%  
of the organization's activities. 


Initially, it might seem that tax exemption on any income earned by a  
section 501(c)(4) is a sufficient subsidy under Regan to justify the  limits on 
campaign intervention by section 501(c)(4) organizations.


However, to the extent that a section 501(c)(4) organization engages  
directly or through another organization in campaign intervention, it is taxed  
on the lesser of its investment income or the amount spent on campaign  
intervention.


This tax is imposed to put 501(c)'s that engage in campaign intervention  
in the same position as PACs and  so-called section 527 organizations,  which 
are also taxed on investment income, if any.  


501(c)(4) organizations do have available the option of establishing a  PAC 
or 527 organization, rather than engaging in the campaign intervention  
directly.  It is relatively easy to ensure that the PAC or 527  organization 
has little if any investment income.  That is, there is  available an 
alternate channel that is likely to be subject to little or no  tax.  


The policy reason for this set of rules is assumed to be that Congress  has 
made a decision that all monies contributed to campaign intervention  
should be taxed at least once. (Thus, there is no business deduction allowed  for 
monies used for campaign intervention.) 


Thus, Eugene, I don't think it is accurate to say that 501(c)(4)'s (and  
contributors to them) are entirely free to engage in political speech.  Do you 
think the limits on campaign intervention by sec. 501(c)(4)  organizations 
are unconstitutional or is the possibility of the c-4  establishing a PAC or 
527 organization enough to save the current tax scheme?  


Ellen





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