Aprill: A Tax Lesson for Election Law
Ellen P. Aprill (Loyola LA) published A Tax Lesson for Election Law in the September 30th edition of Tax Notes. The following are the introductory paragraphs of the article:
An August 22 deadlock by the Federal Election Commission regarding a request for an advisory opinion highlights the complicated role that tax law plays in regulating campaign finance. It underscores important differences between section 501(c)(3) and (c)(4) organizations not only under section 501(c), but also under section 527. Moreover, because the resignation of the FEC vice chair has left the commission without quorum and thus unable to act, tax regulation of campaign finance has increased importance.
On May 31 the Price for Congress committee (the Price committee) filed a request with the FEC for an advisory opinion regarding transfer of remaining campaign funds from former legislator Price’s campaign committee. The committee asked for approval to transfer some, although not all, of its remaining almost $1.8 million to a section 501(c)(4) social welfare organization (the 501(c)(4)). The request prompted passionate debate and deep division but no resolution by the FEC commissioners when it was discussed on July 25 and again on August 22.
As proposed, the 501(c)(4) would “engage in research, education, presentation, and publications with respect to health, budget, and other public policy matters.” Although unlike section 501(c)(3) organizations, a 501(c)(4) is permitted to lobby without limit and to engage in considerable campaign intervention, the request stated that this 501(c)(4) “will not attempt to influence legislation nor participate or intervene in any political campaign.” The Price committee also proposed that any transferred funds be placed in a separate account and not be commingled with other assets of the 501(c)(4). To comply with applicable election law regarding private use by former candidates, neither the transferred funds in this special account nor income generated from these funds would be used to provide Price, any members of his family, or former employees of the Price committee or of Price’s government offices with compensation, gifts, or material reimbursement, or “to influence any election.” Price, however, would serve as the organization’s president and chief executive officer, albeit without any compensation. The Price committee anticipates that he would “speak, write, publish, or otherwise make appearance to present the work” of the 501(c)(4).
Under election law, campaign funds can be contributed “to an organization described in section 170(c) of the Internal Revenue Code” as well as “for any other lawful purposes.” Under tax law, a 501(c)(4) would not be described in section 170(c) because that provision describes organizations that are eligible to receive tax-deductible charitable contributions, and a 501(c)(4), unlike a 501(c)(3), is not such an organization.
In responding to the Price committee request, however, FEC draft advisory opinion 19-33-A, issued on July 17, did not read the reference to section 170(c) as limiting transfers to organizations eligible to receive deductible charitable contributions. The draft opinion explains that if an organization engages in educational activity and constrains itself from lobbying and campaign intervention, it is described in section 170(c) for purposes of campaign finance law, even if it is not eligible to receive tax-deductible contributions.
At the July 25 FEC meeting, Chair Ellen L. Weintraub objected strongly: “If we were to approve this advisory opinion, it would extend the ‘personal use’ exemption to 501(c)(4) organizations in a way that the commission has not done before.” Republican members disagreed, and the FEC postponed its decision. . . .
At its meeting on August 22, however, the FEC “was unable to render an opinion by the required four affirmative votes and concluded its consideration of the request.” The Price committee will now have to decide whether to proceed without an FEC advisory opinion. The commission’s lack of sufficient commissioners for a quorum, however, prevents any possible enforcement action.
Whatever the Price committee decides, its choice of a 501(c)(4) rather than a 501(c)(3) raises several issues under applicable tax law and its interaction with election law. In short, transfers to a 501(c)(4) rather than a 501(c)(3) offer advantages regarding IRS transaction costs and oversight, but also involve some income tax risks to the former candidate. The Price committee request also reminds us of some of the inadequacies of our regulation of campaign financing, both through tax law and election law. . . .
Nicholas Mirkay