Litigation by the Senate Permanent Subcommittee on Investigations to enforce a subpoena for documents from Carl Ferrer, the CEO of Backpage, an online forum accused of contributing to sex trafficking, has taken another interesting twist, with the D.C. District Court ruling that Backpage cannot assert the attorney-client privilege to protect certain documents. It is rare for a court to issue a ruling on attorney-client privilege in a congressional investigation, and the court’s ruling has significant implications for any individual or company facing demands from Congress for documents, information, or testimony.
Federal Court in D.C. Rules Against FEC in Important Disclosure Case
In an important decision, U.S. District Judge Christopher Cooper today ordered the Federal Election Commission to reconsider its dismissal of a complaint filed by CREW against two tax-exempt advocacy organizations that have never registered with the FEC. CREW alleged that the two groups, American Action Network and Americans for Job Security, had as their “major purpose” influencing federal elections, and that they therefore should have registered as federal political committees, which would have meant disclosing their donors. The FEC split 3-3, with the three Republican Commissioners voting not to find “reason to believe” that a violation had occurred.
For years, campaign finance reform groups have sought to breathe life into the “major purpose” test, first enunciated in the seminal 1976 campaign finance law case, Buckley v. Valeo (a case that was litigated by Covington & Burling). There has been considerable uncertainty since Buckley as to the point at which expenditures related to federal elections would cause influencing federal elections to be an organization’s “major purpose.” Judge Cooper ruled that the FEC erred in two respects when it dismissed the cases against AAN and AJS. First, the Republican Commissioners had considered only “express advocacy” of the election or defeat of clearly identified federal candidates to count for purposes of the major purpose test. The Court held that electioneering communications should have also been taken into account, even though they do not include express advocacy. Second, the Court ruled that the Commissioners erred by considering the groups’ recent election related ads only in the context of their lifetime history of activities spanning many years, which tended to downplay the centrality of federal election activity to their missions. Accordingly, the Court remanded the case to the FEC for further proceedings.
For a variety of practical reasons, there is a good chance that the case will now die on the vine at the FEC. Because the Court did not define a specific standard that the FEC must adopt, limiting itself to rejecting the standards that the Republican Commissioners applied, ample room remains for the FEC to deadlock again on remand, even if the deadlock rests on different grounds. But the significance of the case has less to do with the final outcome of this particular case, and much more to do with the standard that will apply in future cases. Depending on whether the FEC appeals the Court’s decision, and if so, the outcome of the appeal, Judge Cooper’s decision may point the way to a more expansive conception of the major purpose test, validating campaign finance reform groups’ decades long crusade to use that test as a battering ram to force outside groups to register as reporting committees. In the short run, it is fair to assume that those filing complaints with the FEC will cite liberally to Judge Cooper’s decision.
Supreme Court Refuses to Stay Senate Subpoena, Highlights the Difficulties Inherent in Challenging a Congressional Subpoena
The Supreme Court today refused to block a subpoena by the Senate Permanent Subcommittee on Investigations of the online forum Backpage and its CEO Carl Ferrer. As we previously reported, Ferrer lost at the District Court in his effort to block the Senate subpoena, arguing primarily that the subpoena abridged his First Amendment rights. Ferrer appealed the District Court’s decision to the Court of Appeals. Since losing at the District Court, Ferrer has been fighting a parallel battle to delay the enforcement of the subpoena while the appeal is pending.
Ferrer sought a stay of the subpoena from the District Court and lost; sought a stay from the D.C. Circuit Court of Appeals and lost; and finally sought a stay from the Supreme Court. The Supreme Court delayed the enforcement of the subpoena briefly last week to permit both sides to submit briefs, but today’s action lifts that reprieve. Ferrer will now face a short deadline with which to comply with the Senate’s demand for documents.
Have We Reached A FARA “Tipping Point”?
The New York Times, earlier this month, reported that “secret ledgers” in Ukraine show $12.7 million in cash payments designated for former Donald Trump campaign chairman Paul Manafort from Ukraine’s pro-Russian political party. Days later, the Associated Press reported that Manafort helped the pro-Russian party “secretly route at least $2.2 million in payments to two prominent Washington lobbying firms.” These stories sparked a flurry of questions about whether Manafort and others unlawfully failed to register with the Department of Justice as foreign agents. This coverage, in turn, has sent “shockwaves” in Washington, with Politico today noting that “reps from multiple firms who lobby for foreign entities think this might be a tipping point, and the feds might take a broader look at other firms and clients.” As we face a potential “tipping point” in FARA interest and enforcement, Covington today published this advisory which provides a basic compliance primer for those working for or contracting with foreign companies, governments, political parties, and individuals.
FEC to Reconsider Political Involvement by U.S. Subsidiaries of Foreign Corporations on Tuesday
Foreign nationals, both individuals and corporations, have long been barred from making contributions in federal, state or local elections in the United States. The statutory prohibition includes contributions made “directly” or “indirectly,” bars the solicitation as well as the making of contributions, and since 2002, includes a ban on expenditures, independent expenditures, or electioneering communications by foreign nationals. Penalties are stiff, including incarceration for a criminal violation.
But how should the law treat U.S. corporations that are subsidiaries of a foreign corporate parent? Are they “American” if run by U.S. citizens, incorporated in the United States, and U.S. citizens make all funding and spending decisions? The FEC first answered this question in a 1978 advisory opinion and, in essence concluded that if U.S. citizens control the decisions about contributions and the operation of the PAC, using corporate funds raised from U.S. operations, and the PAC contains only funds from lawful U.S. donors, the ban on “indirect” contributions by a foreign national does not apply, even if the U.S. subsidiary is wholly owned by a foreign parent company.
This view has always had its dissenters, but for decades this has been the view of a majority at the FEC. However, since 2012, at least three FEC Commissioners have argued that this view of the law is incorrect, and that the issues should be reconsidered and/or reversed so that U.S. subsidiaries of foreign corporations would be barred from making contributions or expenditures in federal, state or local elections, including being barred from operating a corporate PAC. This has generated 3-3 deadlocks in a number of advisory opinions. The FEC will revisit the issue Tuesday, as Commissioner Ravel has placed the issue on the agenda for the FEC’s next meeting, seeking to remove the exemption for U.S. subsidiaries run by U.S. nationals.
There seem to be three principal arguments in favor of a change.
- The tools presently available to enforce the law are too weak to address the threat, and only an outright ban is sufficient to stop foreign involvement.
- Even when foreign nationals have no direct role in contribution decisions, the foreign ownership alters the thinking of the Americans who run the U.S. subsidiary, and their loyalties cannot help but shift to the interests of their foreign owners, and only a total ban can prevent this indirect influence.
- Citizens United led to an unwarranted expansion of corporate political power, and this is one way to reign it in.
In a statement released in advance of the meeting, Commissioner Ravel seems to be advancing the first of these arguments, citing a recent and successful Justice Department prosecution of a foreign national who funneled contributions into a state election, and a recent news report alleging that foreign nationals directly controlled a U.S. corporation’s decision to give to a super PAC. Some will take this as a sign the current regime is working, with violations being uncovered and prosecuted.
The issue is unlikely to be resolved at the FEC on Tuesday, but will remain a hot button topic in campaign finance, and should be on everyone’s radar screen if Congress takes up the issue of campaign finance reform in the next Congress.
OGE Updates Rules Governing Recruiting of Federal Employees to Private Sector Jobs
Companies are increasingly hiring out of the federal workforce, only to find that their new hires are restricted by “revolving door” rules that prohibit their participation in certain matters – sometimes for a limited time, sometimes permanently. New rules issued recently by the U.S. Office of Government Ethics (“OGE”) serve as a reminder that, even before hiring a federal employee, a company may find itself entangled in federal ethics rules that regulate the job negotiation process. This advisory outlines the newly issued rules that include substantive additions and changes that will affect employers.
The Senate’s District Court Win in the Backpage Subpoena Fight Could Have Significant Implications for Congressional Investigations
Last week, the U.S. District Court for the District of Columbia ruled in favor of the Senate Permanent Subcommittee on Investigations in a rare case that has the potential to contribute significantly to the case law concerning congressional investigations. It is uncommon for a federal court to have an opportunity to rule on a congressional subpoena – congressional subpoenas generally cannot be challenged in court unless the recipient defies Congress and Congress votes to hold the recipient in contempt. Most private sector companies simply cannot endure the bad publicity and reputational damage that accompanies a congressional contempt proceeding. Backpage, an online forum for classified advertisements that includes advertisements for adult services, and its CEO Carl Ferrer apparently are not swayed by such concerns.
For more than a year, the Senate Permanent Subcommittee on Investigations has been conducting an investigation of Backpage as part of an inquiry into human trafficking. According to the National Center for Missing and Exploited Children, advertisements on Backpage are associated with “a majority of the child sex trafficking cases being reported” to the organization.
After conducting an interview of Backpage’s general counsel in June 2015, the Subcommittee subpoenaed Backpage for documents in July 2015. Almost immediately, Backpage objected to the subpoena on First Amendment grounds. After further back and forth, the Subcommittee subpoenaed Backpage’s CEO Carl Ferrer for a narrower set of documents and ordered him to appear at a hearing on November 19, 2015. Backpage produced a limited set of documents to the Subcommittee, but it continued to object to a further response on First Amendment grounds. Ferrer did not appear at the November hearing, and the Subcommittee held a hearing with an empty chair before it – another rarity in congressional investigations. The Subcommittee approved a resolution to enforce its subpoena, and the resolution was adopted by the full Senate in March 2016.
In its ruling last week, the District Court found for the Subcommittee, rejecting four defenses raised by Ferrer.
First, the court addressed Ferrer’s claim that it lacked jurisdiction to hear the case because the Senate sought to enforce only three of the eight requests contained in the subpoena. Ferrer’s argument was based on a unique aspect of the statute authorizing the Senate to enforce its subpoena in court – the statute states that the court may not “modify” the subpoena. In Ferrer’s view, selective enforcement equates to modification. The court disagreed, stating that the statute does not constrain the Subcommittee’s ability to seek partial enforcement of its subpoenas. Therefore, the court was enforcing, unmodified, those parts of the subpoena brought before it by the Senate.
Second, the court rejected Ferrer’s argument that the subpoena was not tied to a legitimate legislative purpose. Under Supreme Court precedents, Congress has the power to investigate any subject on which it can legislate. Given that Congress can legislate on sex trafficking and the internet, and Congress has previously legislated on internet publishers’ immunity for statements of third parties, the court easily concluded that the subpoena was related to a legitimate legislative purpose.
Third, the court examined Ferrer’s First Amendment defenses and concluded that they did not protect him from complying with the subpoena. Ferrer claimed that the Subcommittee’s subpoena encroached on his First Amendment rights, sought to punish disfavored speech, and chilled his exercise of his First Amendment rights. The court was unconvinced. The court was most critical of Ferrer’s attempted use of the First Amendment to shield Backpage from even searching for materials in response to the subpoena, determining which of the documents reflect speech protected by the First Amendment, and explaining the specific manner in which the subpoena would intrude on First Amendment rights. The court concluded that Ferrer’s position that “any responsive document that has not been produced contains constitutionally-protected information that no governmental need could possibly overcome” is “untenable and without legal support.”
Finally, the court rejected Ferrer’s claim that the investigation violated his due process rights by being ill-defined in scope and shifting in focus. The court described these arguments as “undeveloped,” “devoid of legal support,” and “unclear.”
The court ordered Ferrer to comply with the Subcommittee’s subpoena within ten days.
Instead of producing the subpoenaed documents, this week, Ferrer appealed the District Court’s decision to the Court of Appeals for the District of Columbia Circuit, and simultaneously sought to postpone his compliance with the subpoena while the appeal is pending. In his motion to stay compliance with the subpoena, Ferrer focused on his First Amendment arguments: The District Court “misapprehends the nature of Mr. Ferrer’s First Amendment claims and undervalued the constitutional interests at stake,” the filing said.
Depending on the outcome of the appeal, this case may contribute significantly to the case law concerning congressional investigations and the enforceability of congressional subpoenas.
Litigation to enforce a congressional subpoena against a private sector company or individual is rare. According to the Senate Legal Counsel’s filings in the case, the Senate has sought to enforce a subpoena under its civil enforcement authority only five times, with the last enforcement proceeding occurring in 1994. This case provides an opportunity for the appellate court to consider aspects of the statute that are rarely addressed in litigation, such as Ferrer’s argument regarding the statute’s limitation on courts modifying a subpoena.
Practitioners and scholars generally consider jurisdictional challenges to congressional investigations to be foreclosed by the modern scope of Congress’s legislative authority. Because Congress’s legislative reach is so broad, and its investigative authority is coextensive with its legislative authority, Congress can investigate practically anything, the reasoning goes. The appellate court may have an opportunity to address these issues if Ferrer continues to argue that the subpoena is not tied to a legitimate legislative purpose.
Finally, and potentially most significant, it appears that the D.C. Circuit will have an opportunity to address the limitations that constitutional protections place on congressional investigations. Although Congress takes a dim view of many privileges and protections, including the attorney-client privilege and executive privilege, Congress readily acknowledges that it is bound by constitutional limitations such as the First Amendment. There is very little recent case law addressing constitutional protections in the context of congressional investigations, even as the Supreme Court’s views on the First Amendment and other constitutional rights have evolved over recent decades.
House Clerk’s Office Apparently Sends Out Late Lobbyist Report Notices In Error
Earlier this afternoon, the House Clerk’s Office sent out emails to a number of registered federal lobbyists and lobbyist organizations alerting them to a missing 2016 Mid-Year LD-203 contribution report (due on August 1, 2016). It appears that this email was sent in error to a batch of registrants who properly filed their reports on time. We have confirmed with the House Clerk’s office that they are aware of this error.
It is unclear how many of these erroneous LD-203 late notice emails were sent, but if you received one, you should be on the lookout for a clarifying email from the Clerk’s Office. If you call to try to confirm your filings, you may face long hold times.
IRS Steps into Fray on Political Activities
The Internal Revenue Service (IRS) recently issued two private letter rulings (PLRs) that may be interesting for tax-exempt organizations that engage in political activity.
In the first ruling, the IRS held that a company could not deduct payments made to charity under a PAC matching contribution program as an “ordinary and necessary business expense.” While the Internal Revenue Code already prohibits income tax deductions for political contributions, the company requested a PLR holding that the charitable contributions are deductible business expenses. In rejecting the deduction, the PLR reasoned that “the contributions to [the] PAC and [the company’s] matching contributions are inextricably linked,” because the company would not have donated to the charity but for the employees’ contributions to the PAC. Plus, the letter held, the matching program is intended to incentivize contributions to the PAC, thus the charitable contributions are clearly “in connection with a political campaign” and not deductible.
The PLR comes on the heels of the FEC’s surprise approval of 2-to-1 corporate charitable PAC match programs this past January and provides some clarity into the tax implications of such matching programs. While campaign finance law now clearly allows corporations to grow their PACs by sponsoring charitable matching programs to incentivize giving, these programs should be viewed with eyes wide open: charitable contributions that help pad a corporate PAC’s coffers are not deductible business expenses.
In a separate ruling, the IRS issued a PLR late last year formally rejecting an organization’s qualification as a 501(c)(4) social welfare organization because it failed to adequately explain what social welfare activities it would undertake. The organization applied for (c)(4) status, claiming that its sole activity in the prior year was to hold a candidate forum and that it had no future activities planned. The organization also acknowledged that it planned to spend money to influence elections, although that was not its primary purpose. The organization repeatedly ignored IRS requests for additional information to verify the social welfare activities of the organization.
Unlike 501(c)(3) charitable organizations, 501(c)(4) organizations may conduct some political activity as long as it is not the organization’s primary purpose. 501(c)(4)s are a common vehicle for lobbying activity, in the form of direct and grassroots advocacy, and some political expenditures; however, the PLR is an important reminder that a (c)(4) must engage in some social welfare activities, which do not include intervention in campaigns for or against candidates.
The PLR also emphasizes the importance of prospectively explaining to the IRS the exempt activities the organization plans to undertake. While the letter acknowledged that “candidate forums” and similar activities “may meet the definition of social welfare by furthering voter education purposes,” it still faulted the organization for failing to describe its “planned activities for the future.”
Finally, the letter serves as a cautionary tale for (c)(4)s that failure to respond to questions by the IRS could result in the denial of tax-exempt status. We note that the organization had the option to “self-declare” tax-exempt status as a 501(c)(4) organization rather than filing an application with the IRS.
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?
Yes.
