501(c)(4) Social Welfare Organizations Must Provide Notice to the IRS

In December 2015, we informed readers of the new requirement for 501(c)(4) social welfare organizations to notify the IRS upon formation. Enforcement of the requirement was delayed until the IRS was able to issue an appropriate form. The IRS recently announced that 501(c)(4) organizations may now register on the IRS website.  We respond to common questions about the procedure below.

What form is used to provide notice?

Form 8976, Notice of Intent to Operate under Section 501(c)(4).

What 501(c)(4) organizations don’t have to submit Form 8976?

501(c)(4) organizations that were organized on or before July 8, 2016 that have either (i) applied for a determination letter by filing IRS Form 1024, Application for Recognition of Exemption under Section 501(a); or (ii) filed at least one annual information return or notice (Form 990, Form 990-EZ, or 990-N) are not required to file Form 8976.

When is Form 8976 due?

September 6, 2016 for those organizations formed on or before July 8, 2016 which have not either (i) applied for a determination letter by filing IRS Form 1024, ; or (ii) filed at least one annual information return or notice (Form 990, Form  990-EZ, or 990-N).

For organizations formed after July 8, 2016, the due date is 60 days after the date of organization, e.g., date of incorporation.

Are there any penalties if the Form 8976 is submitted late?

Yes, a penalty of $20.00 per day (not to exceed $5,000) may be imposed on the organization and, in certain cases, on the person responsible for the failure to file.

How does one submit Form 8976?

Forms 8976 must be submitted online at the IRS registration services website. Paper submissions will not be accepted. The filer must first obtain a password to use the site before filing Form 8976.

Is there a fee to file?

$50.00 for 2016. Pay at www.pay.gov.

What information do I have to provide about the organization?

  • Name of the organization;
  • Address of the organization;
  • Employer Identification Number (EIN) of the organization;
  • Date of formation;
  • State or other jurisdiction of organization;
  • Statement that the purpose of the organization is to operate as either a (i) social welfare organization/civic league, or (ii) local association of employees;
  • Month the organization’s annual accounting period ends; and
  • Attestation that the information provided is correct and the individual submitting Form 8976 is authorized to submit it on behalf of the organization.

Will I receive an acknowledgment from the IRS?

After the bank confirms payment of the fee and the IRS validates the organization’s information and eligibility, the organization will receive an acknowledgment notice within 60 days.

Is Form 8976 available to the public?

No, Form 8976 is not open to public inspection.

Does the receipt of an acknowledgment mean that the IRS has determined that the organization qualifies as tax-exempt?

No, an organization that files Form 8976 is merely notifying the IRS that the organization exists. To obtain a determination letter from the IRS the organization must file IRS Form 1024, Application for Recognition of Exemption under Section 501(a).

May an organization that files Form 8976 operate as a 501(c)(4) organization without filing an application for exemption (Form 1024)?

Yes, section 501(c)(4) organizations may “self-declare” tax-exempt status but must annually file the applicable information return or notice (Form 990, Form 990-EZ, or 990-N).

If a 501(c)(4) organization files Form 8976, must it also file Form 990, Form 990-EZ, or 990-N each year?


The Supreme Court Redraws the Lines for Corruption Prosecutions

The Ferrari carrying former Virginia Governor Bob McDonnell appears to have made a U-turn this week on its way to the federal penitentiary.  Covington released today a Client Alert on the Supreme Court’s decision in McDonnell v. United States, a decision which vacated Governor McDonnell’s conviction and redraws the lines for corruption prosecutions.   The Court held a public official does not violate federal law simply by taking a benefit in exchange for arranging a meeting with or providing access to public officials and employees, or asking those employees to consider an issue.  Instead, the official must take action or make a decision, or agree to do so, on a specific and focused matter that involves a  formal exercise of government power, including advising or pressuring others to take an action or make a decision.  But, as described in the Client Alert, the consequences of McDonnell should not be exaggerated.

Coercing Contributions at Work: The FEC’s Latest Decision

On Friday, three Federal Election Commission (FEC) Commissioners provided a clear description of their understanding of the facts and law that led them to oppose opening an investigation into whether Murray Energy coerced its employees into making political contributions. Statement of Reasons of Chairman Petersen and Commissioners Hunter and Goodman, FEC MUR 6661.  While clarity in the law is always to be commended, the standard they use to define when a contribution is coerced is narrow and will certainly allow conduct that many employers now reject as excessive.  As with two earlier decisions in which three Commissioners voted not to pursue enforcement actions against employers who compelled employees to attend a candidate’s rally or to waive signs or make calls supporting a candidate, it is clear that the FEC will not be an effective barrier to employers pressuring employees to engage in many kinds of political activity.  As Lindsay Burke and I noted in a recent article in Corporate Counsel Magazine, there remain state employment law issues to consider, but the signal from this recent FEC case is unmistakable.

The FEC needs the affirmative vote of four Commissioners to proceed with an investigation or enforcement action, so the rules as articulated by these three Commissioners will define enforcement going forward. They are clear on the following points.

  • So long as a standard FEC disclaimer (that little box of words at the bottom of the page in a solicitation) is present, only clear evidence of an employer’s specific acts or statements constituting a threat of physical force, job discrimination or financial reprisal is prohibited. There must be “demonstrable, objective evidence of threats or reprisals” for a violation to occur. So in all but the most extreme cases, the presence of a disclaimer can be a “get-out-of-jail-free” card.
  • The subjective view of the employee or even of the FEC that a solicitation is potentially coercive is not determinative. The three Commissioners find it “natural” for an employee to feel “uncomfortable” when solicited by a supervisor, so feeling pressure to give is not evidence of coercion. Instead, the employer must make an explicit threat or take retaliatory action.
  • The statute only limits coercion in soliciting contributions to the PAC. The three Commissioners appear to adopt the view that the FEC’s rules do not protect an employee from being coerced into giving directly to a candidate or political party.

With this standard in place, the three Commissioners found the following conduct did not meet the test for beginning an investigation into whether there was “demonstrable, objective evidence of a threat or reprisal.”

  • An employer asking employees for a show of hands of those who were contributing to the PAC.
  • Informing employees that the response to a prior solicitation was “poor” and “if we do not win this election,” the industry will be eliminated “and so will your job.”
  • Informing employees that their supervisor or the CEO is “insulted” by every salaried employee who does not contribute.
  • Multiple solicitations targeting employees who did not give when asked the first time.
  • A general sense among employees that contributions are required for successful advancement at the company.

There is no doubt the standard as articulated, and the application of it to the facts here will be seen as moving the line significantly for those employers who ask: “Will I get in trouble with the FEC for doing this?” Many employers choose to stay far from the line for organizational reasons, as well as because they believe the law requires it.  In addition, some state laws protect employees from coerced political activities and the Justice Department retains concurrent jurisdiction to pursue criminal violations of the campaign finance laws.  But the statement issued Friday makes clear that, for many companies, a decision to be far more aggressive in requesting contributions from employees will not be second guessed at the FEC, so long as the appropriate disclaimer appears on the bottom of the solicitation.

“When One Door Closes . . .”: McCain-Feingold Opens “Soft Money” Loophole In the States

A recent settlement between the Massachusetts Office of Campaign and Political Finance (OCPF) and Massachusetts Republican Party may highlight an emerging trend: state parties using federal preemption to avoid strict state campaign finance laws.  At issue was whether the Massachusetts Republican Party could use funds from its federal campaign account to pay for staff and overhead expenses of Party employees who were working largely or exclusively on state races.  Massachusetts law has tighter contribution limits than federal law, so for state races, federal funds include money that would be impermissible under state law.  In the end, Massachusetts regulators acquiesced to the Party’s use of the less regulated federal funds, even when working overwhelmingly on state races.  Only when party staff was working exclusively on state races did the OCPF and Party agree that state funds had to be used.  This result is similar to an issue we have written about in Connecticut, where litigation is ongoing over a state party’s use of federal funds that did not comply with the state pay-to-play law, to fund activities that supported the governor’s reelection campaign, as well as federal candidates.

In Massachusetts, the state Republican Party used its federal account to pay staff salaries, office rent, health insurance, and payroll taxes for state campaign activities. In the Bipartisan Campaign Reform Act of 2002 (“BCRA” or “McCain-Feingold” as it was more commonly known),  Congress distinguished between mandatory and permissive spending of federal dollars for staff and office space used for both state and federal campaign purposes.  For staff who spend more than 25% of their time on federal campaign activities, salaries must be paid entirely out of a federal account.  Thus, a state party employee who spends 70% of their time on state races must be paid with 100% federal funds, under federal law.  Since at least 2008, OCPF guidance has recognized that where certain expenses are required by federal law to be paid from a federal account, those funds may be used to support state candidates.  For other administrative expenses, including rent, utilities, and office equipment, federal regulations permit state parties to either (1) spend entirely from the federal account, or (2) allocate between state and federal accounts, with a minimum amount allocated to the federal account depending on which federal offices stand for election that cycle.  As a result, state party committees can spend significantly less state funds on staff by sharing the cost with their federal account, which has a higher fundraising limit and can receive unlimited transfers from the national party.

Thus, while federal law requires the use of federal funds for federal election activities under certain circumstances, what is less clear is whether a permissive federal rule will trump a mandatory state rule:  If state law requires certain expenses to be paid from state funds, but federal law allows those expenses to be paid from federal funds, who prevails?

Although it did not expressly find that state law is preempted—the decision came in the form of a settlement agreement, rather than an enforcement order—the agreement strongly suggests that OCPF believes federal regulations constrain its power to limit state parties’ use of federal dollars for expenses that federal law merely permits to be paid from federal dollars.  Federal rules allow parties to either pay 100% of these costs from a federal account, or to allocate (with at least 28% coming from federal funds in a presidential election year) expenses between the federal and state account, but do not mandate which option to adopt.  The rules also allow, but do not require, parties to allocate salaries, as long as the staffers spend more than 75% of their time on state activities.  Only when state party staff worked exclusively on state candidate activities did the OCPF and the party agree that non-federal funds had to be used.

The OCPF and state party were not explicit as to the reasoning why parties could operate under the federal rules in these permissive scenarios rather than having to allocate their expenses between their state and federal account in order to comply with the state law requiring state campaigns to use state funds.  However, the OCPF’s 2008 decision can be read to support parties having this  choice.

The settlement may also make it harder for Massachusetts to regulate party committees that opt into an all-federal spending model.  This is because federal law permits a political committee that opts to pay salary expenses entirely from federal funds to not maintain a log of staff time spent on state versus federal activities.  In the event that the amount of federal activity slips below 25%—meaning payment of salaries is merely permissive under federal law—or to zero—meaning that federal funds cannot be used for state activities—state regulators will have greater difficulty proving a violation when no time records exist.  Indeed, the Mass GOP settlement itself reflects this phenomenon: because the party did not keep a log of staff time, OCPF could not determine whether certain party staffers were engaged in federal election activity and to what extent, and found they should have been paid from the state account.

In the wake of this decision, some voices in Massachusetts are calling for greater transparency.  For example, a bill has been introduced that would require that all contributions from political committees (including in-kind contributions from federal accounts) to state candidates come from state funds.

While the impact of this decision on OCPF’s regulation of the line between state and federal elections remains to be seen, this settlement and the ongoing litigation in Connecticut demonstrate that federal law can undercut the ability of states to police and disclose the influence of soft money in state elections.  This trend only underscores the irony of McCain-Feingold: a federal law designed to limit the influence of soft money in federal elections is preventing states from enforcing regulatory regimes that would more robustly regulate political money.

Forming and Operating Super PACs: A Practical Guide for Political Consultants in 2016

Covington recently released a high-level primer that provides political consultants with a practical resource for creating and running a federal Super PAC in a legally compliant manner.  The primer, which is available here, explains the history and basic rules that apply to federal Super PACs.  The primer then discusses the following key topics:

  • checklist of steps for creating a federal Super PAC;
  • options available to Super PACs for federal reporting;
  • safeguards Super PACs should implement to avoid illegally coordinating with candidates;
  • “do’s” and “don’ts” for candidate involvement in fundraising; and
  • rules governing the operation of Super PACs alongside Section 501(c)(4) social welfare organizations.

This primer draws from Covington’s extensive experience advising federal, state, and local Super PACs and their donors.

New Overtime Rules May Spell Trouble For Some Corporate PACs

The Obama Administration’s publication yesterday of a regulation increasing the universe of employees entitled to overtime pay might reduce the number of employees from whom corporate PACs can seek contributions.

The new regulations, which take effect on December 1, 2016, increase the salary level below which certain employees are entitled to overtime pay.  Currently, salaried employees are not entitled to overtime pay if they perform certain duties and are paid at least $455 per week (the equivalent of $23,600).  Under the new regulations, the duties test would remain the same but the salary threshold would increase to $913 per week, $47,476 annually, adjusted every three years for inflation.

As we described when the regulations were first proposed last year, the increase in the salary threshold should not require companies to stop asking the newly overtime-eligible employees for PAC contributions.  When evaluating whether an individual falls within the “restricted class” of employees who may be solicited for PAC contributions, FEC regulations require companies to look at the individual’s job duties, not the compensation amount.  And the new regulations do not change this “duties test.”

But even though the rules will not reduce corporate restricted classes as a matter of law, corporate decisions to change compensation structures in response to the rule might effectively shrink the “restricted class.”  Federal law provides that corporate PACs generally may only solicit PAC contributions from employees if, among other things, the employees are salaried.  If companies respond to the rule by paying the newly overtime-entitled employees on an hourly basis rather than on salary,  those hourly employees will need to fall off the restricted class lists even if their job duties would have otherwise placed them in the restricted class.

Enforcement, Clarity Delayed for FINRA Pay-to-Play and Third Party Solicitation Rules

The Securities and Exchange Commission announced Tuesday that it will allow further comment on a pay-to-play rule proposed by the Financial Industry Regulatory Authority (FINRA).

As we discussed previously, if the SEC approves FINRA’s pay-to-play rule, it would clarify that investment advisers are allowed to hire third party solicitors if they are subject to FINRA or Municipal Securities Rulemaking Board (MSRB) pay-to-play rules.  The SEC has indicated that it will hold off on enforcement of the third party solicitor provision until both FINRA and the MSRB rules go into effect.  If the FINRA rule had simply been adopted, the reprieve on enforcement would have ended this fall.

What impact will this decision have?  Most likely, delay of the inevitable.  Unless the federal pay-to-play landscape is radically altered, we expect the SEC and FINRA to reach agreement on a pay-to-play rule.  The most likely impact of the SEC’s announcement is to delay resolution of the SEC’s rule regarding the hiring of third party solicitors until later in the fall this year or into next year.  The SEC’s reprieve on enforcement is likely to continue until the matter is resolved.

Why is the SEC allowing comment?  One reason may be to protect itself against a legal challenge through careful consideration of comments critiquing FINRA’s proposed rule on First Amendment and other grounds.  One reason to suspect this is so is that critiques of the FINRA proposed rule are similar to those raised in a recent law suit that sought to overturn the SEC’s pay-to-play rule, and in a petition asking for the SEC’s rule to be repealed.

As the SEC proceeds with consideration of the FINRA rule and the petition to repeal the SEC rule, we may see further development of important statutory and constitutional questions regarding the viability of pay-to-play laws, as discussed in the Wagner case.

Annual GAO Report on Federal Lobbying Compliance Shows Mixed Enforcement Bag: Fewer Audits, More and Larger Enforcement Penalties

On Friday, the Government Accountability Office (GAO) issued its ninth annual report on compliance with the federal Lobbying Disclosure Act (LDA), covering from mid-2014 through mid-2015.  As in the past, the report is based on random audits of lobbyists’ filings and analysis of enforcement by the U.S. Attorney’s Office for the District of Columbia.  We examine the report’s data on enforcement, discuss common compliance issues, and identify three takeaways from the report.

Enforcement on the Rise

The report contains two noteworthy facts about enforcement of the LDA.  First, the GAO conducted fewer audits of quarterly LD-2 reports than it had in the past, looking at only 80 reports instead of the approximately 100 that it has historically examined (though it still audited the standard 160 semi-annual LD-203 contribution reports).  The report does not give any indication of whether this was a temporary or permanent reduction in audits, or what caused it.  While the audits are supposedly done at random and GAO does not conduct them to force registrants into compliance, they still make up part of the enforcement scheme insofar as surviving an audit should be a goal of all registrants.

Second, while audits were down, civil penalties are up in both frequency and amount, with potential for continued increases in coming years.  According to the report, we should expect the U.S. Attorney’s office to announce up to five LDA enforcement actions soon.  This could make 2015-2016 the busiest year for civil penalties on record.  The GAO also notes that a previously-announced settlement of $125,000 is the largest ever for noncompliance.  Finally, in 2013 (the most recent year with complete data) Congress referred significantly more noncompliant lobbyists to the U.S. Attorney for potential enforcement than in prior years.  This could indicate even more civil settlements to come.

Common Compliance Issues

The areas where the GAO found the highest rates of noncompliance included:

  • Former Positions. 21% of LD-2 reports may not have properly disclosed lobbyists’ prior government work. In advance of audits, the GAO searches public sources like LinkedIn to review work history of audited lobbyists to find unreported positions that it can ask about in the audit.
  • Rounding. 31% of LD-2 reports did not round to the nearest $10,000. The report speculates, based on anecdotal evidence, that some registrants report exact amounts instead of rounded amounts because the rounding rule is contained in congressional guidance and the law, but the LD-2 form can be read to request an exact dollar figure.
  • LD-203 Reporting. 15% of registrants failed to file semi-annual LD-203 reports documenting political contributions, required of all lobbyists whether they made covered contributions or not. This is a big issue, because the LD-203 both reports contributions and is a mechanism of ensuring lobbyist compliance with Congressional gift rules. Lobbyists who do not file an LD-203, even if inadvertently, avoid this compliance mechanism. The auditors also check these reports against FEC campaign finance reports to seek out violators.

Three Key Takeaways

The report contains a few takeaways for registrants.  First, compliance is not easy.  By many of the rubrics the GAO measured, 20% or more of registrants are not in compliance with the law even though most of those audited said compliance was easy or very easy.  This indicates that even those who think they are in close compliance may have missed an issue.  Second, while odds of facing audit are slightly down, odds of paying a penalty are increased, as are penalty amounts.  While these cases still focus on what the GAO refers to as “chronic offenders,” the U.S. Attorney’s Office’s increased emphasis over the years on these cases bears watching.  Third, the GAO has continued to streamline and perfect its audit processes and is looking at more than just filings – for example, the report explains GAO might look at lobbyists’ social media accounts and FEC reports to catch noncompliance.  For these reasons, it is more important than ever that registrants be prepared for an audit or potential enforcement action.

FCC Releases TCPA Enforcement Advisory Directed to Political Campaigns

Yesterday, the FCC released an Enforcement Advisory to remind political campaigns about their obligations under the Telephone Consumer Protection Act (“TCPA”).  The Advisory did not set forth any new rules for calls and texts; rather, it confirmed existing rules and reminded political campaigns that they are subject to them.

The Advisory first confirmed that prerecorded or autodialed calls to mobile phones are prohibited, except in cases of emergencies, federal debt collection, or with the prior express consent of the recipient.  The Advisory then summarized the requirements for prerecorded or autodialed calls to landline phones, including identification and line seizure requirements.

The Advisory concluded with a reminder that failure to comply with the TCPA can lead to enforcement actions and penalties as high as $16,000 per violation.  This is in addition to any private right of action that the TCPA authorizes, with statutory damages as high as $1,500 per call.  The Advisory also cross-references talking points and a FAQ with further information about how the TCPA applies to political campaigns.

Expanded March 30 Filing Enhances Pay-to-Play Disclosure, Highlights Penalties for New Jersey Government Contractors

New Jersey is well-known for having strict, comprehensive, and complex pay-to-play laws.  Two new changes to an annual pay-to-play filing required of some government contractors will only enhance that reputation.

State law requires a company that receives $50,000 annually through government contracts in New Jersey to file a report by March 30 of the following year disclosing most of its public contracts and political contributions in the state.  Covered companies must disclose their 2015 activity online using Form BE by March 30, 2016.

The New Jersey Election Law Enforcement Commission (“ELEC”) recently amended Form BE to include two new requirements effective this year.  First, the filer must certify that the statements in the form are true, and that he or she is aware that willfully filing a false statement may lead to punishment.  Second, the form now requires that a filer identify whether each disclosed contract “was awarded pursuant to a fair and open process.”

These changes may appear minor but are significant for three reasons.  First, highlighting the possibility of false statements prosecution signals  a potential liability for contractors at a time of increased attention to pay-to-play violations in New Jersey.  The state is wrapping up its largest-ever prosecution of pay-to-play violations in which multiple executives of a company pled guilty to evading the pay-to-play laws.  Individual sentences included six-figure fines, debarment, and likely jail time, while the company paid $2 million in fines and is no longer in business.  In this atmosphere, and with this new certification, a truthful and accurate disclosure is of paramount importance.

Second, the fair and open certification touches on other parts of New Jersey’s notoriously complex pay-to-play reporting and prohibition system.  For example, certain laws only apply to contracts not awarded via a fair and open process, so identifying a contract as one that was not awarded by a fair and open process highlights the contract for regulatory agencies.  Disclosing that a large contract was awarded by other than a fair and open process may create public relations problem for contractors as well.

Third, determining whether a contract was awarded pursuant to a fair and open process is not always a simple task.  State law requires a contract awarded according to a “fair and open process” to, “at a minimum,” be:

  • advertised in advance in newspapers or on the contracting entity’s website;
  • awarded by a process providing for public solicitation for proposals and under a process established in writing; and
  • opened and announced publicly upon award.

However, the final decision on whether a contracting process was fair and open is left to the entity awarding the contract.  This means that the fair and open analysis rules might change based on who awarded the contract.  Nonetheless, contractors will have to make this determination and disclosure with the new false statements certification lurking in the background.