Reporting Donors’ Names to IRS No Longer Required for Certain Nonprofits Per Final Treasury Regulations

Certain tax-exempt organizations are no longer required to report to the IRS the names and addresses of donors on IRS Form 990, Schedule B, according to final regulations published on May 28, 2020.  Noncharitable organizations, such as 501(c)(4) social welfare organizations and 501(c)(6) trade associations, may report only the amounts received from each substantial contributor on Schedule B.  An organization must keep the donors’ names and addresses in its records and make them available to the IRS in the event of an examination.

Only 501(c)(3) charitable organizations and 527 political organizations will still have to report names and addresses of substantial contributors during a taxable year.  Private foundations and 527 organizations must continue to make Schedule B available to the public, without redaction.

The final regulations largely mirror proposed regulations that were issued in September 2019 following litigation we described in a prior post that invalidated the IRS’s previous attempt to issue these rules through Revenue Procedure 2018-38.

According to the preamble, the IRS does not need the names and addresses of substantial contributors in order to administer the Internal Revenue Code.  Addressing numerous commenters who expressed concern about the change in policy, the IRS claimed that it can obtain sufficient information from other elements of the Form 990 to evaluate possible private benefit or inurement. Additionally, due to the IRS’s duty to protect confidential information, removing the requirement to report names and addresses will reduce the risk of inadvertent disclosure.  Finally, in response to the concern that the new rules would lead to an increased flow of money into U.S. elections by making it difficult to detect foreign spending, the IRS explained that it is not authorized to enforce campaign finance laws, and that Schedule B reflects enforcement purely with respect to the Internal Revenue Code.

The final regulations are effective May 28, 2020 but may be applied to returns filed after September 6, 2019.

DOJ Begins to Move Existing FARA Registrants to a New E-File System

Following the Department of Justice’s announcement in March 2019 of an initiative to increase enforcement of the Foreign Agents Registration Act (“FARA”), the Department began rolling out a new electronic filing system for FARA registrations in September 2019. At that time, as Covington reported, the new system applied only to new registrants, and the Department indicated that it would transition all filers to the new system over time. It now appears that the Department has begun to move some existing registrants to the new system.

Recently, Covington noticed that some existing registrants are being directed to a new e-file system when logging into the Department’s website. This new system provides online forms for various filings, including supplemental statements, exhibits, amendments, short forms, informational materials, and more. Similar to the manner in which the Department replaced the old PDF form for the initial registration with the online system in September 2019, the Department has now replaced the remaining PDF forms with this new online system for some registrants.

It is not exactly clear which registrants have been moved to the new system. We have found that some existing registrants continue to be directed to the old system. That system, which has been in place for more than a decade, provides a process for uploading PDF forms and attachments created by the registrant. As best we can tell, registrants that completed an initial registration under the new system – i.e., those that registered for the first time after last September – were the first to be moved to this new system for the rest of the FARA forms.

The new system has a few notable additions. As noted in our prior alert, the Department is requiring that filers submit a scan of a “wet” signature on a DOJ template for filings submitted through the new system.  The system also has a new “Review and Validate Incomplete Tasks” function for registrants to review pending tasks regarding amendments or supplemental statements, and a more streamlined process for providing updated information about officers and directors of the registrant. There does not appear to be a method for submitting a cover letter to a filing. The prior system permitted the inclusion of a cover letter, which registrants often used to provide ancillary or explanatory information to the Department.

Covington will continue to monitor developments to the e-file system and post updates regarding this new system as they become available.

Congressional Pandemic Oversight Bodies Begin to Take Shape

As we reported in our prior client advisory on the wave of investigations to follow the pandemic, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act established three new bodies to conduct oversight and investigations on pandemic-related issues. Separately, House Speaker Nancy Pelosi announced a special committee to conduct additional pandemic-related oversight. In recent weeks, these new bodies have begun to take shape. This client alert summarizes the key developments so far.

Reopening the FEC

In a 49-43 vote along party lines, the Senate confirmed Texas attorney James “Trey” Trainor to the Federal Election Commission today.  This gives the FEC a quorum for the first time since August 31, 2019, when former Commissioner Matt Petersen stepped down to enter private practice.  What effect will this have on the FEC and the 2020 election?   Here are a few preliminary answers to that question.

Curb your enthusiasm.  By statute the FEC has six commissioners and all actions of significance require the affirmative vote of four of those six individuals.  When Commissioner Trainor takes his seat, only four of those six positions will be filled.  This means that all significant actions of the agency will require the unanimous vote of all sitting Commissioners.  The deep partisan and ideological divisions between the three current Commissioners has limited the agency’s actions in the past, and that is likely to continue.  So expect no big things from the FEC in the near future.

Clearing the docket.  The absence of a quorum for the past eight months has led to a backlog of cases which have been settled at the staff level, but not approved by the Commissioners.  These will be easy votes for Commissioner Trainor, so expect a flurry of closed matters in the next several weeks.  The other thing that will appear in those closed cases will be matters where the statute of limitations ran while there was no quorum.  Again, an easy vote for a new Commissioner, so expect those early.

Advisory Opinions.  There are four advisory opinion requests pending and the agency has agreed to decide those matters within 30 days of the Commission’s first open meeting after a quorum is established.  So expect early decisions on these matters as well.  They involve reasonably non-controversial topics:

  • Can a candidate’s campaign committee pay for the candidate’s health insurance;
  • Can a for-profit company hosting an on-line forum on politics avoid the FEC’s regulations when advertising using a candidate’s name;
  • Can a PAC use a candidate’s initials in its name; and
  • Can a PAC forwarding earmarked contributions retain a processing fee?

We expect others to seek advisory opinions in the run-up to the election, though the Commission has historically been reluctant to make significant changes to the rules shortly before an election, so most decisions should clarify the law in incremental ways.

Enforcement:  While not visible to the public, the greatest significance of a quorum for practitioners will be the reviving of the agency’s enforcement machinery.  At several steps in the FEC enforcement process, staff lawyers must return to the Commissioners for a vote to proceed.  For the past eight months, enforcement cases have been stalling when they reach one of these points in the process.  Commissioner Trainor is likely to want to look closely at some of these matters, for how the agency proceeds may have significant consequences.  But slow or fast, these investigations will begin again.

Rulemaking: As a practical matter, the divisions among the FEC’s Commissioners have left the agency with no significant rulemakings in the past decade.  The presence of only four Commissioners and the need for unanimity ensures that this will remain true.

It is better that government functions than not, so achieving a quorum at the FEC is a step in the right direction.  But its importance is modest, as the deep divisions among the Commissioners are likely to continue, and the ability of the agency to interpret and enforce the law will be similarly limited.

House Leaders Push Ahead with Proposal for Virtual Oversight

Last month, we highlighted congressional efforts to ensure that Congress is able to continue conducting the business of the American people during the ongoing COVID-19 crisis. After weeks of halting progress, those efforts took an important step forward this morning with the release of a proposed resolution that would temporarily modify the House rules to enable remote action both on the House floor and in House committees. The proposed resolution, which is expected to be considered by the House Rules Committee tomorrow morning, would have immediate implications for new and ongoing oversight investigations in the House.

As we explored in our previous post, current House and Senate rules require committee meetings to be open to the public and impose in-person quorum requirements for formal committee action. These rules have complicated efforts to conduct oversight virtually, with initial efforts to conduct so-called “paper hearings” scuttled after the Senate Rules Committee advised that such procedures did not qualify as official hearings under the Senate rules.

In April, House Democrats put forward a proposal that would have amended the House rules to loosen these requirements for in-person participation in official committee action and provide a path forward for oversight investigations—both old and new. The original Democratic proposal would have authorized the Speaker to permit Members to cast floor votes by proxy upon receiving a formal notification from the House Sergeant-at-Arms that a “pandemic emergency is in effect.” In addition to enabling remote floor action, the resolution would have provided new authorities for House committees to conduct official business virtually during any period in which proxy voting is permitted.

In response to GOP opposition, Speaker Pelosi abruptly paused consideration of the Democratic proposal soon after its release and formed a task force to study the issue and come forward with consensus recommendations. The resolution introduced today is the byproduct of those discussions.

Overall, the new resolution narrows the scope of the original proposal in certain respects. Under the new proposal, the Speaker would be authorized to permit proxy voting only upon a formal notification from the House Sergeant-at-Arms that a “a public health emergency due to a novel coronavirus is in effect.” Likewise, whereas an order permitting proxy voting would have automatically expired after 60 days under the original resolution, that period is now reduced to 45 days. On the other hand, the new resolution would go further by designing a process to permit actual remote voting (i.e., as opposed to voting by proxy). Remote voting would be permitted upon certification by the Committee on Administration that “operable and secure technology exists” to enable such voting, among other prerequisites.

Beyond these broader changes, however, the new rules governing remote committee hearings are largely unchanged. Specifically, the resolution would allow House committees to “conduct proceedings remotely” and provides that such proceedings are “considered as official proceedings for all purposes in the House.” Committees conducting hearings would be required to ensure that Members are able to participate virtually “to the greatest extent practicable,” with those Members counted for the purpose of establishing a quorum. The resolution also includes language harmonizing any temporary virtual procedures with existing committee rules. Most notably, committee chairs would be authorized to “issue subpoenas for return at a hearing or deposition to be conducted remotely.” Likewise, the resolution would allow for witnesses to be placed under oath remotely and provides that witnesses may be accompanied by legal counsel when offering testimony.

The resolution does not designate a particular technology that committees must use to take testimony virtually, but the Rules Committee has advised that the Committee on Administration must approve the technology chosen. Further, the Committee on House Administration is tasked with studying the feasibility of differing technologies, to assess the security and usability of any technologies used for remote committee proceedings. Finally, the resolution specifically provides for the technical challenges that will surely arise as Congress adapts to unfamiliar virtual solutions, allowing Committee chairs to “declare a recess subject to the call of the chair at any time to address technical difficulties with respect to such proceedings.”

While these proposed procedures are designed to allow the House to continue to operate in the immediate future, House Rules Committee Chairman James McGovern has emphasized that these are temporary solutions. Whether Senate leaders will follow their House colleagues in embracing virtual committee action remains uncertain. As before, Covington’s congressional investigations team continues to monitor these developments closely and advise clients on the impacts of any procedural changes on ongoing and future congressional oversight inquiries.

A Rookie’s Guide to Federal Lobbying Compliance: Four Key Risks for Companies Contacting Government Officials on COVID-19 Matters

As the impact of the COVID-19 pandemic spreads through every industry, companies that previously steered clear of Washington, D.C. may find themselves contacting the federal government for assistance. From communicating with Members of Congress about potential provisions of the CARES Act to requesting new forms of assistance from federal agencies that oversee their industries, these companies may find themselves subject to federal lobbying disclosure laws for the first time. This alert highlights four key risk areas for companies newly engaged in federal government outreach.

State Lobbyist and Campaign Finance Filing Changes Related to COVID-19

As states grapple with the effects of the COVID-19 crisis, many have opted to make changes to campaign finance and lobbying reporting due dates and filing procedures. Covington has published a client alert containing a chart of changes to state campaign finance and lobbying filing schedules that states have announced as of last week.

Campaign Finance Violation for Unregistered Political Committee Upheld in Washington State, but $18 Million Penalty Must Still Pass Excessive Fine Test

In one of the most watched campaign finance disclosure enforcement cases, last week, the Washington State Supreme Court upheld a trial court’s finding that a trade association intentionally failed to register and report contributions and expenditures in opposition to a ballot initiative that would have required labeling of genetically modified organisms (GMOs) in food.  In 2016, a Washington court imposed what appears to be the largest campaign finance penalty ever imposed in any jurisdiction, ordering the association to pay an $18 million fine ($6 million, tripled after the violations were deemed intentional), plus trial and investigative costs and attorney’s fees.  In late 2018 a state appeals court overturned the trial court’s decision to award treble damages, but left the rest of the ruling intact.  The court remanded the question of whether the resulting $18 million penalty is an unconstitutional excessive fine.

The Supreme Court’s decision is especially important for three reasons.  First, it upheld the trial court’s more relaxed standard for determining when an intentional violation of the campaign finance laws has occurred.  Second, it declined to adopt a “primary purpose” requirement when determining if an entity must register as a political committee, at least in cases where the activity in question involved the raising of funds for political purposes, as opposed to the more common case where the spending of funds is at issue.  Third, it highlights the dramatic variation in levels of enforcement of campaign finance violations at the federal and state level.  While the narrative in the press and among advocacy groups often involves tales of lax enforcement, this is one of a number of instances of the opposite: aggressive enforcement leading to substantial penalties.

Prior to the 2014 election, when the measure was to be considered by the voters, the trade association, the Grocery Manufacturers Association (GMA), solicited over $14 million in contributions from its member companies—above and beyond regular trade association dues—for a “Defense of Brands” account, specifically to oppose the GMO ballot measure.  The trade association then contributed over $11 million to oppose the ballot measure, listing itself, and not its individual member companies, as the donors to the “No on 522” ballot committee.  Washington’s Public Disclosure Commission (PDC) reported its investigative findings to the state Attorney General’s Office, which filed a lawsuit the following day.

The court determined that the trade association was a political committee under the “contribution prong” of Washington’s political committee definition, which covers entities that “expect[] to receive or receiv[e] contributions.”  In assessing if an entity has become a “political committee,” Washington courts have adopted a “segregated funds requirement” for organizations, that are funded primarily by membership dues.  Such organizations trigger political committee status based on contributions only if “the members are called upon to make payments that are segregated for political purposes and the members know, or reasonably should know, of this political use.”  The Supreme Court declined to add a primary purpose requirement to the contribution prong of the political committee definition.  Under the “expenditure prong” of the political committee definition, an entity must have a primary purpose of supporting or opposing a candidate or . . . ballot proposition.  (Note: Covington is also monitoring the PDC’s announcement that it is considering amending its primary purpose guidance for entities making political expenditures.)

The court sided with the trial court on the correct standard for determining an intentional violation, rejecting a more stringent test put forth by the court of appeals.  Rejecting treble damages in this case, the court of appeals held that one must “subjectively intend to violate the law in order to be subject to treble damages.”  The Supreme Court, however, accepted the trial court’s standard that did not require subjective awareness of illegality, but only “whether the person acted with the purpose of accomplishing an illegal act under [the campaign finance law].”

The GMA decision is representative of Washington’s robust campaign-finance enforcement and further solidifies its reputation as one of the most aggressive state regulators in this area.  State Attorney General Bob Ferguson has taken an aggressive enforcement posture against campaign finance violations.  In October 2019, Ferguson’s office filed another lawsuit over alleged failures to disclose ballot measure spending, this time against the Evergreen Freedom Foundation.  Just last week Ferguson filed a lawsuit against Facebook for selling Washington state political ads “without maintaining information for the public as required by Washington state campaign finance law.”

A Growing Trend

This case follows a trend that has emerged in recent years of state enforcement against organizations accused of failing to register and report in compliance with campaign finance laws and/or “earmarking” contributions for political purposes.  As in Washington, these cases have resulted in record fines in multiple jurisdictions around the country.  Both the organizations themselves—and in some cases their donors—face liability for failing to register as political committees and report contributions.  And donors face the risk that regulators may compel public disclosure of donations that the donors thought would never be disclosed.

For example, in 2017, Families for Excellent Schools – Advocacy settled with the Massachusetts Office of Campaign and Political Finance for nearly $430,000 for failing to register as a ballot committee, failing to timely file campaign finance reports, and making contributions designed to conceal the true source of the contribution.  The California Fair Political Practices Committee, famously obtained a settlement of $1 million in fines and $15 million in disgorgement in a 2013 undisclosed ballot measure donation case.

While other cases have resulted in less extreme fines, they nevertheless highlight aggressive – and costly to defend – enforcement of state campaign finance laws.  For example, in 2018, a Montana nonprofit “issue advocacy” organization called the Montana Growth Network settled for $30,000 following six years of investigation and litigation into its failure to register as an independent expenditure committee and failing to disclose political expenditures.

Cautionary Spending

Last week’s Washington State Supreme Court ruling is representative of the unpredictable nature of state campaign finance enforcement.  This can present an especially difficult problem for those responsible for political law compliance across the fifty states as well at the federal level.  Entities making political contributions and expenditures must be vigilant about compliance with the ever more robust regulation of these activities in some states.  Most jurisdictions have a broadly worded statute that requires any entity that makes or accepts political contributions, or makes expenditures for political purposes, to register as a political committee and file disclosure reports.  How those statutes are interpreted can vary greatly, and have significant consequences.  Politically active entities need to be attentive to what will trigger registration before seeking to influence political campaigns or ballot initiatives within a state.

When making contributions to politically active nonprofits and LLCs, it is important for donors to properly vet the recipient organization to gauge whether it is complying with the law, and to assess their comfort with the uneven risk of enforcement across jurisdictions.  Covington has previously issued an advisory concerning “earmarked” contributions to politically active organizations.

GAO Set To Launch Flurry of COVID-19 Related Audits

The Government Accountability Office (“GAO”), often referred to as Congress’ watchdog, is ramping up its oversight activities in preparation for an influx of investigations into fraud, waste, abuse, and mismanagement of funds distributed in Congress’s $2 trillion Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The GAO recently signaled its intent to investigate a wide range of issues related to the CARES Act, from the handling of the coronavirus crisis by federal agencies to the distribution of CARES Act funds to private businesses and individuals. Press reports indicate that GAO, which often reaches out to private companies for fact gathering, expects to initiate at least 30 reviews and audits by the end of April. Further, last week the Comptroller General (the head of the GAO) called on government employees, contractors, and private citizens to assist the GAO in these efforts by reporting allegations of fraud, waste, abuse, and mismanagement to FraudNet, the GAO’s whistleblower hotline.

The GAO joins a number of other governmental entities examining the coronavirus response, and even more still being assembled. The CARES Act’s oversight bodies, such as the Special Inspector General and the Pandemic Response Accountability Committee, are just starting their activities.  And the House Select Committee on the Coronavirus Crisis, which Speaker Pelosi announced earlier this month, will not be able to organize until Congress returns to Washington. Unlike these new oversight entities, GAO already has a large staff of skilled investigators already in place and is adept at investigating federal agencies and businesses and individuals who interact with federal programs. Moreover, the GAO—which is required to provide a report to Congress on its CARES Act-related oversight ninety days after the Act’s enactment and then bimonthly—can take investigative requests from congressional committees as well as individual Members of Congress. Where other oversight entities may face challenges in getting started, the GAO may play a key fact finding role in investigating allegations of CARES Act-related fraud or abuse.

Covington often advises clients on responding to GAO inquiries.  We will continues to monitor these developments and advise clients on the implications of GAO’s focus on CARES Act oversight. Covington’s broad range of experience in investigations, including inquiries from the GAO, positions the team well to respond to the GAO’s CARES Act reviews and audits.

Congressional Paper Hearings: The Future or The Past?

Congressional leaders are actively exploring ways to continue the work of Congress as the COVID-19 crisis continues to unfold.  Currently, Congress is not able to have live, in-person hearings, which are the primary tool for conducting oversight of both the private sector and the executive branch.  With existing oversight investigations still underway—and the recent establishment of both a House Select Committee on the Coronavirus Crisis and a COVID-focused Congressional Oversight Commission—leaders in both chambers are testing new procedures to obtain witness testimony outside of traditional in-person hearings.  Already, however, these efforts have begun to run up against existing rules governing hearing procedures.

In recent days, at least two Senate committees have held so-called “paper hearings” through which the committees obtained witness testimony entirely in writing.  Paper hearings began in late March in the Senate Armed Services Committee and the Senate Committee on Commerce, Science, and Transportation.  The Committees are undertaking slightly different methods for obtaining witness testimony.  Under the procedures outlined by the Armed Services Committee, Members submit opening statements and witnesses submit written testimony prior to the hearing date.  These statements and testimony are made available on the Committee’s website on the date of the hearing, with the Committee then publishing Member questions and witness responses within a week thereafter.  The Commerce Committee’s paper hearing process is a little different.  After posting opening statements and written testimony online, Commerce Committee Members must submit questions to witnesses by the close of business, with witnesses then given 96-business-hours to respond.  All questions and responses are later published on the Committee’s website.

Even though these Committees have already begun utilizing these procedures for paper hearings, the Senate Rules Committee has now advised that such procedures are not official hearings under the Standing Rules of the Senate.  Senate Rule XXVI describes a hearing as a public event that occurs at a specific time, date, and location with at least one Senator present to accept testimony from a witness.  Moreover, many Senate committees have in-person quorum requirements to take testimony, with any official action by a committee, including reporting out legislation, necessitating in-person voting.  Maybe not coincidentally, just last night, the Senate Armed Services Committee postponed a second “paper hearing” that was scheduled for today.

On the other side of the Capitol, House leaders face a similar challenge as they explore the limits of remote congressional action.  Late last month, several former Members of Congress and a former House Parliamentarian conducted a mock remote hearing via video conference to test the technical feasibility of conducting remote hearings.  As this trial run suggests, technologically speaking, existing commercial off-the-shelf technology is available to support virtual hearings.  Like in the Senate, however, the permissibility of such hearings under the House rules remains an open question.  House Rule XI requires each meeting of a committee or subcommittee to be open to the public, except when the majority of Members elect to move to a closed executive session, and imposes in-person quorum requirements.  Both of these rules complicate efforts to conduct committee business remotely.

Whether the House and other Senate committees will ultimately join the Senate Armed Services and Commerce Committees in embracing paper hearings, even if they are not official hearings, or possibly pursue more technologically advanced solutions, will have significant implications for oversight in both chambers.  Covington’s congressional investigations team continues to monitor these developments closely and advises clients on the impacts of any procedural changes on ongoing and future congressional oversight inquiries.

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