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

Thu Dec 22 11:44:45 PST 2011

                I appreciate the discussion, and recognize that my knowledge of tax law is tiny.  But even if 501c3's can't speak about candidates using 501c4 affiliates, can't they speak freely about candidates using 527 affiliates, so long as they raise non-tax-exempt money for that?  If the answer is "no," then I think that under the logic of FCC v. LWV and Regan v. Taxation With Representation, the scheme would indeed be unconstitutional.  (But if the objection is simply that organizations that speak about candidates must pay the same taxes as ordinary business organizations - including newspapers that speak about candidates - must pay, then I don't see a constitutional problem.)

                Eugene

From: BZall at aol.com [mailto:BZall at aol.com]
Sent: Thursday, December 22, 2011 8:12 AM
To: ellen.aprill at lls.edu; Volokh, Eugene
Cc: law-election at uci.edu
Subject: Re: [EL] ELB News and Commentary 12/20/11

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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