Citizens United Changed Landscape: May Produce Some Landmines For Nonprofit Organizations

February 10, 2010

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 “Citizens 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 reporting.
  • 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 Congress.

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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