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Attorneys Raise Concerns About Revenue Ruling on Advocacy Ads

DEC. 30, 2003

Attorneys Raise Concerns About Revenue Ruling on Advocacy Ads

DATED DEC. 30, 2003
DOCUMENT ATTRIBUTES
  • Authors
    Colvin, Gregory L.
    Fei, Rosemary E.
  • Institutional Authors
    Silk Adler & Colvin
  • Cross-Reference
    For the full text of Rev. Rul. 2004-6; 2004-4 IRB 1, see Doc 2003-

    27045 [PDF] (9 original pages) or 2003 TNT 247-2 Database 'Tax Notes Today 2003', View '(Number'.
  • Code Sections
  • Subject Area/Tax Topics
  • Industry Groups
    Nonprofit sector
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2004-64 (4 original pages)
  • Tax Analysts Electronic Citation
    2004 TNT 1-25
December 30, 2003

 

Judith E. Kindell, Esq.

 

T:EO:RA:G

 

Internal Revenue Service

 

1111 Constitution Ave., NW

 

Washington, DC 20224

 

 

Re: Revenue Ruling 2004-6

Dear Judy:

[1] Any time we get guidance from the IRS on political activities of exempt organizations, it is welcome and useful. This certainly includes Revenue Ruling 2004-6, announced December 23, 2003. We have to worry, though, in situations where the IRS appears to give a green light to a type of activity that could be exploited to intervene in candidate election campaigns. After the passage and recent validation of the McCain-Feingold campaign finance reform legislation (the Bipartisan Campaign Reform Act of 2002 or BCRA), tens of millions of dollars can be expected to pour into any promising loophole in the scheme of regulation.

[2] Specifically, we are concerned that the IRS may have inadvertently handed campaign strategists an enormous loophole in the form of Situation 2 of the new Revenue Ruling. We believe there is a very real possibility that, unless the IRS clarifies this example promptly, massive amounts of soft money will be used to pay for TV and radio ads in battleground states that meet the criteria of Situation 2. The contributions for these ads would not only be unlimited, but they would be anonymous and could even be tax- deductible.

[3] Situation 2 describes an issue ad targeted at voters in a state where a contested Senate primary election campaign is occurring. The Section 501(c)(6) organization paying for the ad favors international trade, and claims that the incumbent Senator has taken positions opposing international trade. The ad asks the audience to contact the Senator and tell him to vote for a trade bill that will be voted on before the election. The ad also asks people to donate to the organization. The example, unlike others in the Revenue Ruling, does not indicate that the organization has advertised in this state on this issue before.

[4] The IRS states that the ad would NOT be classified as a political exempt function expenditure under Section 527. Therefore, the ad would not need to be run by a separate 527 segregated fund, would not be subject to the 35% tax under Section 527(f), would be treated as a proper primary activity for a Section 501(c) organization, and could even be an appropriate activity for a Section 501(c)(3) organization.1

[5] Our basic concern arises from the vague and ambiguous phrasing of negative factor (c): "The communication targets voters in a particular election." That factor is explicitly present in all six examples, even the ones treated as permissible nonpolitical communications. If by this phrase the IRS means to say "the communication is disseminated broadly to the public in an area where an election is occurring," the factor may be negative but is fairly benign, in our view.

[6] However, for political strategists, the concept of "targeting" has an entirely different meaning. It refers to the selection of certain states or congressional districts, and not others, for activities such as the placement of issue ads, based on where close elections are occurring. Such intentional selection of "battleground" or "swing" states for issue advertising, to us, indicates that a significant, if not dominant, purpose of the ad is to influence the election of candidates in the targeted area. That should be enough, in our view, despite the presence of a grass roots lobbying message, to cause the communication to fall under Section 527 (see PLR 9725036).

[7] We doubt that the Service intended this result, but it is there, and the potential for abuse of the new Revenue Ruling has been greatly heightened by recent events outside of tax law. Here's why:

[8] The McCain-Feingold legislation contains a ban on corporate and labor payments for TV and radio ads that mention the name of a candidate within 60 days before a general election and within 30 days before a primary or caucus. That law, just upheld by the U.S. Supreme Court, applies right now to broadcast ads in Iowa and New Hampshire, due to the upcoming caucus and primary in those states, and most other states will be involved as the year unfolds. The ban applies to Section 501(c)(6), (c)(5), and most (c)(4) nonprofit corporations, but a Federal Election Commission regulation allows 501(c)(3) charities to run such ads, relying upon the IRS to ensure that charitable broadcast advertising will be nonpolitical.

[9] A 501(c)(3) charity might become the ideal vehicle for interventionist advertising, based upon Situation 2 in the new Revenue Ruling. All a charity needs to do is find a bill (related to its exempt purposes) that is coming up for a vote in Congress before the election, where the candidates have not been publicly known to be divided on the issue, and where the incumbent is believed to be vulnerable. The charity can drop in to a specific state or district, run TV, radio, or newspaper ads attacking the incumbent's positions and calling on the audience to contact him or her to "vote right" on the bill. The charity can use tax-deductible funds for the ads, without disclosure of donors whose funds paid for the ads, treating the ads as grass roots communications within its lobbying limits. Under Revenue Ruling 2004-6, the IRS apparently does not mind if the organization selects only those states or districts where incumbents are facing hotly contested elections, so long as it appears the organization is "lobbying" them on issues. Whatever the IRS intended, practitioners and political strategists will read it that way.

[10] Even if a tax-deductible charity is not used as a vehicle for these issue ads, a 501(c)(4) social welfare organization could be used to run such ads as its primary activity in an election year and keep its tax-exemption, financing the ads with unlimited contributions from undisclosed donors.

[11] To prevent this abuse, the IRS should immediately clarify that the references to targeting voters in a particular election found throughout the new Revenue Ruling, and particularly in Situation 2, do not permit an organization to treat as nonpolitical those mass media ads run only in states or districts selected based on electoral criteria.

[12] The IRS should require the exempt organization in Situation 2 to do more to demonstrate that these ads are nonpolitical. For instance, the IRS could state either that the organization has a history of running such ads outside of election campaign periods, OR that it has a substantial program of similar advertising directed at incumbents in other states or districts who are not up for re-election or are not in a close election contest.

[13] Our law firm has a substantial practice in this area. We have always advised our Section 501(c)(3), (c)(4), and 527 clients that targeting ads that criticize or praise public officials solely to areas where they face close elections is political and not charitable. We would not have advised (c)(3) or (c)(4) clients that they could target ads as in Situation 2 as a nonpolitical activity, prior to the announcement of Revenue Ruling 2004-6. Perhaps we have been too cautious in our advice. If the IRS does not clarify this ruling soon, and especially if our clients' adversaries engage in targeted advertising as described in Situation 2, we will feel obliged to advise them that the IRS appears to condone such advertising.

[14] The IRS announcement of Revenue Ruling 2004-6 requested "comments on situations or factors that the public believes should be covered in future guidance." The ruling should be modified in future guidance -- fast, like next month -- to tighten up Situation 2 and to clarify what is meant by "targets voters in particular elections." If this could be done before publication in the Internal Revenue Bulletin, that would be ideal.

[15] We wanted to get this letter into your hands right away, since this possible misuse of Revenue Ruling 2004-6 would be extremely serious. We do have other comments to make on the new ruling, and we expect to send you a second letter sometime in the next two weeks.

Very truly yours,

 

 

Gregory L. Colvin

 

 

Rosemary E. Fei

 

cc: Lois Lerner, Esq.

 

Steven Miller, Esq.

 

FOOTNOTE

 

 

1While the Revenue Ruling does not explicitly address Section 501(c)(3) charitable organizations, the Service has said on many occasions that the line between political and nonpolitical activities for (c)(3) charities is the same as for (c)(4) social welfare groups and for Section 527 political organizations (with certain exceptions not relevant here). Therefore, especially in light of the lack of current 501(c)(3) precedential guidance on prohibited candidate electioneering, an IRS revenue ruling on political activities for non-(c)(3)'s will be read by practitioners as equally applicable to 501(c)(3) organizations. To depart from the identity of the (c)(3) and (c)(4) standards would be to create much confusion and disarray.

 

END OF FOOTNOTE
DOCUMENT ATTRIBUTES
  • Authors
    Colvin, Gregory L.
    Fei, Rosemary E.
  • Institutional Authors
    Silk Adler & Colvin
  • Cross-Reference
    For the full text of Rev. Rul. 2004-6; 2004-4 IRB 1, see Doc 2003-

    27045 [PDF] (9 original pages) or 2003 TNT 247-2 Database 'Tax Notes Today 2003', View '(Number'.
  • Code Sections
  • Subject Area/Tax Topics
  • Industry Groups
    Nonprofit sector
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2004-64 (4 original pages)
  • Tax Analysts Electronic Citation
    2004 TNT 1-25
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