On Jan. 21, 2010, the U.S. Supreme Court issued a landmark decision in
Citizens United v. Federal Election Commission that may have a dramatic
impact on the level of spending for political activities by business
corporations and nonprofit 501(c)(4) social welfare organizations, 501(c)(5)
labor organizations, and 501(c)(6) trade associations. The Supreme Court struck
down the Bipartisan Campaign Reform Act of 2002 (BCRA) prohibition regarding the
use of corporate funds for “independent expenditures” for the express advocacy
for the election or defeat of federal, state or local candidates or their
equivalents. However, the Court left standing several important restrictions.
In reversing its decision in Austin v. Michigan Chamber of Commerce,
as well as portions of its 2003 decision in McConnell v. FEC, the Court
held that a restriction on the use of corporate treasury funds expended as
“independent expenditures” for political announcements by corporations and labor
unions was an unconstitutional restriction on political free speech under the
First Amendment not supported by a compelling governmental interest when the
funds were used to expressly support or oppose a candidate or political party.
Nonprofit corporations, including labor organizations, trade associations,
and grassroots issue organizations, will now be permitted under the federal
election laws to spend corporate treasury funds to finance public communications
that support or oppose federal candidates for public office, so long as such
expenditures are not coordinated with either the candidate or a political party.
For a detailed discussion of the issues and opportunities for businesses see
United Alters Landscape for Corporate Political Spending: Issues to Consider.”
It is important to remember that this decision overruled an election law
restriction on political speech under 2 U.S.C. section 441(b) of the BCRA, but
did not cover the Internal Revenue Code (IRC) disallowance of business
deductions for political purposes under IRC section 162(e), or the prohibitions
and restrictions against political expenditures by section 501(c)( 3)
organizations and other 501(c) organizations that could jeopardize the
tax-exempt status of such organizations.
Effects of the Court's Decision
- Allows nonprofit organizations, for the first
time, to use funds directly from their own corporate treasury accounts
and/or funds donated to them by business members for political
communications expressly supporting or opposing the election of candidates
for public office (subject to the federal tax laws).
- Permits the use of corporate treasury funds for media communications in
newspapers, television and radio ads, voter guides, congressional
questionnaires, published voting records, and websites that expressly
support or oppose candidates based on the organization’s position on
selected issues (subject to the federal tax laws).
The Court's Decision Did Not:
- Change the existing BCRA requirements for disclosure, disclaimer and
- Change the existing federal tax laws regarding the prohibitions on
political activities by 501(c)(3) charitable organizations. These
organizations still jeopardize their tax-exempt status and the deductibility
of contributions to them, if they engage in political activities that
expressly support or oppose candidates for public office.
- Change the federal tax laws that require other section 501(c) nonprofit
organizations to be primarily engaged in activities that formed the
basis for their exemption from federal income tax under IRC 501. Political
activities are generally not considered as permissible exempt activities
under these provisions. These organizations will be permitted, as they
currently are, to engage in political free speech activity so long as they
engage primarily in tax-exempt activities. If they engage in political
communications of the type described in Citizens United, they are
subject to a 35 percent tax under IRC section 527(f) on such political
expenditures up to the extent of their investment income.
- Change the Political Action Committees’ (PACs) requirements for
exemption from tax under IRC section 527, which exemption is based on the
fact that a PAC is a separate segregated fund; and its expenditures must be
for defined political activities, and are subject to restrictions on
earnings and income expenditures, disclosure and reporting.
Important Issues That Need to Be Resolved
- The effect of the Supreme Court decision on state and local laws that
may be more restrictive on political spending by particular classes of
entities in regulated industries like banks.
- Potential court challenges to the definition of “coordinated public
communications” for political express advocacy.
- Restrictions, if any, on the amount a corporation can contribute to a
federal political committee (currently a $5,000 per year limit). Should
corporations be allowed the same amounts of contributions as individuals in
light of the decision in Citizens United?
- Possible further scrutiny of the prohibition on political activity of
section 501(c)(3) organizations. In the earlier Supreme Court case of
Regan v. Taxation With Representation, the Court allowed a restriction
on the political speech of a 501(c)(3) organization on the theory that a
charity could establish a separate 501(c)(4) organization with a related PAC
to engage in political activity. Accordingly, there was no infringement on
constitutionally protected speech. Religious organizations and other
charities have questioned the validity of this view and may do so again in
light of Citizens United.
While Citizens United settled an important issue on the expenditure of
corporate treasury funds for “independent expenditures” under BCRA and broadened
the landscape for political expenditures, it raised a number of other tax
questions that may need to be resolved by either the courts, the IRS or
McGuireWoods' nonprofit lawyers are available to address any of your
questions and to keep you informed as developments occur in this important area.
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