National Journal: Brave New World Of Political Spending For Nonprofits

National Journal
Brave New World Of Political Spending For Nonprofits
Charities And Other 501(c) Groups Could Find Themselves In An Uncomfortable Spot
By Eliza Newlin Carney
March 15, 2010

In the wake of the Supreme Court’s recent ruling to deregulate corporate political spending, public attention has focused squarely on whether businesses and for-profit companies will now lavish big money on elections.

But Citizens United v. Federal Election Commission may have as much or more impact on another type of incorporated organization — nonprofits of all stripes. These include 501(c)4 advocacy groups, 501(c)5 labor unions, 501(c)6 trade associations and even 501(c)3 charities, which face both fresh opportunities and dangers in the wake of Citizens United.

Associations and advocacy groups can be expected to ramp up their political activities, election lawyers say. At the same time, the ruling — by equating corporate and individual First Amendment rights — could trigger sweeping changes in IRS law as it applies to political activity, some tax experts say. All this could thrust 501(c)3 charities, which are now barred from engaging in partisan political activities, into an uncomfortable spot.

"Potentially, it’s going to profoundly change nonprofit tax law," said Frances R. Hill, a professor at the University of Miami School of Law. Questions raised by the ruling include: Is the ban on partisan political activity for 501(c)3 charities now vulnerable to constitutional challenge? What about the ban on charities making political contributions? It’s only a matter of time before these questions land before the high court, Hill argued.

"Their general constitutional principle is that corporations are persons, and we can’t distinguish among them," Hill said of the Supreme Court. "So I would regard it as a sweeping case that has the potential for changing the entire landscape for exemption in the area of political involvement."

More immediately, the ruling dramatically frees up nonprofit associations and social welfare groups to spend money directly on elections, not just through ads but through voter guides, registration drives, get-out-the-vote activities, sponsoring candidate debates, and other activities.

The ruling ended a decades-old ban on direct corporate and (by extension) union spending on elections. It also threw out a requirement in the 2002 McCain-Feingold law that groups use only hard (regulated) money to pay for ads that picture or name a candidate in the run-up to an election. All corporations, including nonprofits, are affected.

"It opened up a whole host of opportunities for corporations and incorporated trade associations," said Lawrence H. Norton, who co-heads the political law practice at Womble Carlyle Sandridge & Rice, during the firm’s recent webinar on Citizens United. "But with those opportunities come some risks."

For social welfare groups and trade associations, the big question is how to weigh in on elections without running afoul of the IRS. The IRS permits such groups to engage in politics as long as it doesn’t become their "primary purpose." But IRS guidance on how to define primary purpose has been, "to put it charitably, less than a model of clarity," noted Norton.

Certain nonprofits may also become conduits for businesses and for-profit corporations. Businesses may be reluctant to spend directly on elections, for fear of alienating customers and shareholders, but may funnel campaign money through associations and groups that face minimal reporting requirements.

Such 501(c)4, 501(c)5 and 501(c)6 groups are already spending heavily on politics, according to the Campaign Finance Institute, through indirect "issue" messages permitted under the old rules. In 2008, CFI estimates, such organizations poured more than $200 million into political activities.

"I expect the conduit role as campaign finance intermediaries of (c)4s to increase dramatically," said Hill.

Even charitable 501(c)3 groups may face new political pressures, predicted Leslie Lenkowsky, professor of public affairs and philanthropic studies at Indiana University. Though charities are now barred from partisan political activities, he noted, they may find themselves drawn into the post-Citizens United spending spree.

"[The] (c)3s can have affiliated (c)4s, and we now know that (c)4s can get involved, big-time, in elections," said Lenkowsky. "One potential is that more (c)3s that want to get involved in elections will create (c)4s."

That worries lawmakers on Capitol Hill, who have proposed legislation to impose more stringent disclosure requirements on corporate spenders. A centerpiece of the post-Citizens United reform package being written by Sen. Charles E. Schumer, D-N.Y., and Rep. Chris Van Hollen, D-Md., is a system of reporting requirements aimed at making it harder for corporations and labor groups to use intermediaries to mask their political spending.

Some nonprofits, of course, will welcome the chance to amplify their political voices. But others, particularly charities and public interest groups, may face unwelcome pressures in the newly deregulated nonprofit world. Some may face new pressures to "pay to play," as politicians seek fresh avenues for support. Others may find their role as public interest groups called into question.

"Certainly the extractive demands of office holders and other candidates are now going to ratchet up, in the face of this holding, to anyone who’s got any money," said Hill. "So exempt entities, particularly 501(c)4s, will not be able to hide."

"The various restrictions have a protective function for these groups," concurred Lenkowsky. "Now, with those restrictions coming off… you may see a great deal of discomfort on the part of nonprofits."