Vol. II, No. 2May 17, 1994

Lobby Disclosure Bills, H.R. 823, S. 349
FSC legislative activities in the past month have been concentrated on the proposed Lobby Disclosure Act. This bill, now passed by both the House and Senate, was rolling along toward passage, but it hit a snag when Senator Paul Wellstone intervened. Last year, the Senate Government Affairs Committee adopted strict limits on meal, travel, and entertainment gifts for staff and members of Congress, as well as covered executive branch officials, in the Senate-approved Lobby Disclosure bill. Recently, Wellstone and others urged that the Senate include even more stringent provisions. On May 11th, the Senate passed the new restrictions. The bill is now in conference.

FSC met with a large number of trade association and corporate representatives who are concerned about the proposed legislation. Though many are worried about the impact of limiting gifts, most were concerned as is FSC about the onerous regulatory burdens such new laws place on nonprofit organizations. Several representatives suggested that nonprofits were drawn into this bill primarily by mistake arguably, the legislation was originally intended to target strictly business corporations.

If the bill is passed, the new legislation could cost individual nonprofits thousands of dollars annually in accounting costs or force them not to engage in advocacy at all. It only takes an opponent to suggest irregularities in your organization's accounts to make your organization subject to an audit by the Office of Lobbying Registration. Your lack of understanding, your attorney's lack of understanding, and your accountant's lack of understanding as to the definition of "legislative activity" is no defense. This law would put hundreds of smaller organizations in legal jeopardy, while placing others in great financial straits.

FSC members have been requested by fax to contact the members of the House-Senate conference committee. We urge all those who may have members or donors whose Senators or Representatives are on the conference committee to contact such members or donors, and ask them to urge their representatives to delete nonprofits from the final bill, or at least that the double record-keeping requirement be dropped. (Please call Howard Segermark if you can help in this area, or if you need a copy of the list of Conferees • 202-547-2222).

Membership Campaign Announced|
After a recent meeting of the FSC Executive Committee, it was announced that FSC would immediately begin a three-month membership campaign. FSC retained Howard Segermark to supervise this effort. Segermark will work with FSC members and the Membership Committee co-chaired by Bruce Eberle (Bruce W. Eberle and Associates, Inc.) and Harriet Trudell (Feminist Majority). Segermark said he is anxious to hear suggestions from members and prospective members as he moves into this project (telephone 202-547-2222).

Welcome to New FSC Members
Since our last newsletter, the following nonprofit organizations, and others, have joined FSC: the Southern Poverty Law Center, the National Right to Life Committee, the Law Enforcement Alliance of America, Inc., and the Coalition to Stop Gun Violence.

State Regulators Seek Broad Powers to Attack Nonprofit Organizations
The National Association of State Charity Officials ("NASCO") is an association of state regulators who oversee nonprofit organizations. In January 1994, NASCO sent a proposal to the House Ways and Means Committee (Subcommittee on Oversight) that can only be considered a frontal attack against nonprofit organizations, particularly tax-exempt IRC 501(c)(3) and (c)(4) organizations. In its proposal, NASCO exhibited a degree of hostility to the nonprofit organizations its members regulate. Its proposal was later incorporated in a resolution adopted by the National Association of Attorneys General ("NAAG"), at its 1994 spring meeting in Washington, D.C. NASCO and NAAG want to give state regulators unprecedented access to the confidential federal tax records of exempt organizations and greatly expand the list of federal penalties that could be imposed on exempt organizations.

The NASCO/NAAG proposal begins with the broad, unsubstantiated accusation that "there us a great deal of fraud and abuse by tax exempt organizations…" This is the sort of unproven generalization that bureaucrats and regulators always seem to employ to justify increasing their power. The NASCO/NAAG proposal would make available to state regulators the information and results of examinations and audits of tax-exempt organizations conducted by the Internal Revenue Service ("IRS"). According to the proposal, such information, which currently under federal law may not be disclosed (except under certain carefully prescribed circumstances), would always be available to certain state regulators and enforcement officials. This would be a dramatic change, which goes beyond any reasonable requirement of enforcement and into the area of public policy, and which could easily result in confidential tax information becoming available to the general public.

The proposal emanated from a 1993 meeting of NASCO in Santa Fe, New Mexico, in which nonprofit organizations were excluded from many of the working sessions. Most of the meetings of the various state regulators took place secretly, behind closed doors, and saw no input from the nonprofit community NASCO's members regulate. Indeed, nonprofit organizations would have argued most strenuously against adoption of a plan, such as NASCO's, which would throw tax-exempt organizations (alone) back to the days when confidential tax information could be used to try to intimidate and embarrass the taxpayer.

Section 6103 of the Internal Revenue Code places strict restrictions on disclosure of tax information, including returns and audit information. Generally, tax returns of exempt organizations may be disclosed to certain government officers only under very limited circumstances. Examination materials (which include audit information) are disclosed within the context of a very limited tax examination, criminal investigation or other very narrowly defined circumstances only where there is cause. The NASCO/NAAG proposal would change this by allowing unaccountable state officials to obtain the most confidential and privileged information of a tax-exempt organization regardless of whether there were reasonable grounds.

The federal returns (IRS Form 990) of tax-exempt organizations are already available to the public. Many states also require submission of other detailed financial and corporate information, including other information about individuals involved with the nonprofit organization. The NASCO/NAAG proposal would open the floodgates to allow state officials access to IRS examinations of all information available from a nonprofit organization, even the names of donors, and even if that information is unnecessary for the purposes of state registration of such organizations. This flies in the face of our most basic Constitutional protections.

Other aspects of the NASCO/NAAG proposal are also disturbing. NASCO/NAAG is asking the IRS to inform the state regulators about actions it is taking against nonprofit organizations that have been referred to the IRS by state regulators. In the first place, the IRS generally does not favor this type of referral because of the potential for abuse. State regulators who are investigating an organization should not be able to "sic the IRS" on the organization either. Furthermore, once the IRS does begin an investigation, it generally does not disclose to third parties what action it has taken. NASCO/NAAG wants to change this, and effectively to be able to "use" the IRS by obtaining for state investigations all of the tax audit information gathered by the IRS.

Another item in the NASCO/NAAG plan is the proposed establishment of a task force between state regulators and IRS regional exempt organization offices. Again, the purpose is clear. The state regulators wish to involve the federal government in the states' own enforcement activities. NASCO/NAAG wants to take the tag team approach to regulating nonprofit organizations.

The NASCO/NAAG proposal has a further provision affecting 501(c)(3) organizations only. It would require that the Internal Revenue Code be amended to require minimum levels of direct charitable services which must be provided by 501(c)(3) organizations. In other words, to retain tax-exempt status, a 501(c)(3) organization would need to comply with some nebulous requirement of "providing services," which has the ring of an arbitrary standard and which in any event could radically affect existing educational (and other) tax-exempt organizations.

The NASCO/NAAG plan would also include more aggressive imposition of fines and penalties for inaccurate or incomplete Forms 990, and would require unspecified changes to that form. In a related proposal, NAAG has suggested an even higher level of federal involvement in regulating tax exempt organizations. It seeks the involvement of the United States Postal Service, the Federal Trade Commission and other federal agencies in this area, in an effort to add more federal regulation and to further stifle nonprofit organization activities.

On May 5, the Oversight Subcommittee asked the IRS to study these recommendations.

Overzealous state regulators will not stop until the nonprofit community is completely overburdened with restrictions that meet the approval of the state regulators. It is time for the nonprofit community to stand up to the regulators. It would have a tremendous impact if every nonprofit organization would contact its local state representatives, as well as its federal congressional representatives, to inform them that it objects to this move by the state regulators to abuse the rights of the nonprofit community. The FSC will continue to monitor these developments and mobilize opposition to unreasonable proposals.

Federal Legislation Watch
1. The proposals to tax nonprofit organizations for acts of "private inurement" are still on the front burner in the House Ways and Means Committee. The IRS wants to tax the recipient, the nonprofit, and the nonprofit's officers if such "inurement" occurs.
The FSC has made its case to the House Ways and Means Oversight Subcommittee: we seek clear definitions of these terms, not another law which grants arbitrary powers to IRS officials. Many critics see the IRS as having too much power already to go on "fishing expeditions." The cloudiness of a new law and concomitant regulation would force nonprofit organizations into costly compliance measures, diluting their ability to do the good works they were created to accomplish.

2. Congressman Bill Clay's proposal to require any nonprofit organization that lobbies to file with and disclose its donors to the FEC (as if it were a Political Action Committee!) could return and endanger the confidentiality of membership lists.

3. Senator David Pryor's planned hearings on "deceptive mailing practices" have not yet been scheduled this year. We'll monitor it and keep members informed.

4. Senator Ted Stevens' proposal to curb the eligibility of nonprofits that lobby to use special third-class mailing rates could come up whenever the Senator sees an opportunity.

The Free Speech Coalition, Inc. is a nonpartisan, nonprofit organization which educates, lobbies, and litigates to defend the rights of advocacy organizations and their members. FSC needs your support to continue its fight to protect the rights of citizens to associate together and exercise their First Amendment right to petition their government for redress of their grievances. Contributions to the Free Speech Coalition, Inc. are not tax-deductible. For information on FSC programs and membership information, please call 703-356-6912.