Vol. IV, No. 1 January - February 1996

FSC Opposes IRS Proposed “Intermediate Sanctions”
On January 24, 1996, FSC delivered letters to Senator Bill Roth, Chairman, Senate Finance Committee, and to Rep. Bill Archer, Chairman, House Ways and Means Committee, opposing the Treasury Department's request that Congress give the IRS power to impose new tax penalties, called Intermediate Sanctions, on nonprofit charities and advocacy groups. These sanctions would be in addition to current IRS revocation powers.

One of the Administration's intermediate proposals is the excess benefits tax. This provision would impose an excise tax on any "insider" or other disqualified person who received a benefit from an IRC Section 501(c)(3) or (c)(4) organization that the IRS found to be "excessive." It would also penalize any trustee or manager who approved excessive benefits.

The IRS already can punish excess benefits by revoking the tax-exempt status of offending nonprofits. However, the IRS requested the power to punish nonprofits intermediate sanctions because, in the case of "small" violations, where revocation would be excessive, IRS imposes no sanction. Interestingly, the IRS did not request a system of alternative sanctions in the case of excess benefits, which could be a reasonable approach. Rather, the IRS sought a system of double sanctions. Under the proposal, the IRS can both revoke the organization's tax-exempt status and assess the punitive excess benefits tax (this proposal has been incorporated in recent legislation). If the IRS want an alternative penalty, it should ask for just that. The IRS should be barred from imposing double penalties on nonprofits.

Avrahami v. U.S. News & World Report: Direct Mail Recipient Suffers Setback
There was a procedural victory in a court case dealing with a challenge to the ability of an organization to rent, sell, or exchange names on its mailing list. U.S. News & World Report won Round One in the case of Avrahami v. U.S. News & World Report. A district court judge in Virginia dismissed the case for lack of jurisdiction.

In this case, Mr. Ram Avrahami, a U.S. News & World Report subscriber, received a solicitation from Smithsonian magazine, which received Mr. Avrahami's name through renting a subscriber list from U.S. News. Mr. Avrahami sued under a Virginia statute that most believed was originally intended to protect against the commercialization of a celebrity's name. He argued that the statute should be construed broadly to protect individuals from having their names placed on lists which are rented or exchanged without their permission.

The dismissal has not dissuaded Mr. Avrahami, whose attorney told the Free Speech Coalition that the case is about "protecting consumer's property rights" and "forcing companies to seek permission before they use someone's name." The case now shifts to a higher county court, where U.S. News seeks a declaratory judgment that its action was proper.

If Mr. Avrahami wins this suit, the court decision could impose, by the back door, the kind of mailing list regulation that has been discussed or adopted in other states (see FSC Members' Memo of Feb. 12, 1996 on this subject). A for-profit or nonprofit business operating in Virginia that rents, exchanges, or even sells customer, contributor, or other lists could be prohibited, or legally liable, for using individuals' names without permission.

New Congressional Bill To Stifle Public Speech
The Clean Congress Act of 1995, H.R. 2566, may be the next "Mom and Apple Pie" bill that all members of Congress will be afraid to criticize. Unsurprisingly, this pie contains two poisoned apples.

One provision would greatly expand the Federal Election Commission's authority to govern advocacy. The term "express advocacy" is defined extremely broadly, to include voter guides, or any publication criticizing the public policy positions of an office holder or a candidate near an election.

Under another provision, an organization would be deemed to have made a "contribution" to a candidate if it surveyed a candidate on his or her position on the issues.

In the name of creating a "Clean Congress," the bill's authors seek to grant the FEC two broad powers which may lead to abuse. The Free Speech Coalition will inform the House Oversight Committee, and the Senate Rules Committee (both of which plan to hold hearings on this legislation) on the inherent dangers in this proposed legislation.

Lobbying Disclosure Act Becomes Law
The Lobbying Disclosure Act of 1995 was signed by President Clinton on December 19, 1995, and is now law. It took effect January 1, 1996. Knowing violations of the new law are punishable by civil fines of up to $50,000.

The Act imposes new lobbying registration and reporting requirements. The scope of "lobbying" has been broadened to include contacts with congressional staff and certain executive branch officials. A "Lobbyist" is defined as someone who spends at least 20 percent of their time on "lobbying contacts" and lobbying activities, including time spent preparing research to be used for lobbying.

Lobbyists and lobbying firms must register separately for each client, filing a semiannual report with the Clerk of the House of Representatives and the Secretary of the Senate. Organizations must register and list the lobbyists they employ. If a lobbying firm works for a nonprofit, that firm must register and list the nonprofit as a client. However, nonprofit organizations do not have to register if all costs related to lobbying do not exceed $20,000 in the semiannual period. For outside lobbyists and lobbying firms employing a lobbyist, registration is required if expected revenues exceed $5,000 from lobbying each six-month period. In both cases, the registration requirements would be contingent on at least one individual working for a particular client/employer on lobbying activities at least 20 percent of the time spent for that client, and making more than one lobbying contact. Therefore, each registrant must file semiannual reports (February 14 and August 14) with the Secretary of the Senate and the Clerk of the House of Representatives on its lobbying activities during the preceding six-month period.

Organizations that fall under the reporting and registration requirements must register within 45 days of making their first lobbying contact or when they are hired to make such contacts. That means February 15, 1996, for all engaged in lobbying on January 1.

New House and Senate Gift Rules
The House and Senate have amended their rules governing acceptance of gifts. The new rules, which became effective January 1, 1996, are extremely strict. Senate Resolution 158 states that each gift must be less than $50, and the total value of gifts from each source must be less than $100 in a calendar year. In other words, two $49.99 meals a year could be accepted. Most gifts, including meals, of $10 or more count toward the total limit.

New House Rule 52, which governs every Member, officer, and employee of the House, is even more strict. No gift (including meals) may be accepted unless it is a specific exception stated in the rule (e.g., hors d'oeuvres at a reception).

The new gift rules are intricate. It is important to seek guidance whenever there is any question regarding the propriety of a transaction. The best way to get an answer to any question you may have is to contact the House Committee on Standards of Official Conduct or the Senate Ethics Committee, and ask for specific guidance.

Barriers to New Charities Almost Insuperable
Is it the role of democratic government to inhibit its citizens from exercising their constitutional rights? Placed into the context of all of the other "start-up" costs and requirements of a new nonprofit, the list of federal, state and local requirements makes the exercise of such rights more difficult and more expensive.

• The association needs a formal organizational structure and, to limit the possible liability of its volunteer workers, would usually incorporate. Even nonprofit corporations are highly regulated. Most associations must hire legal counsel for advice regarding the organizational structure, and to draft the legal documents (articles of incorporation, bylaws, resolutions, etc.) involved.
• Incorporation in most states involves a registration fee, an annual report requirement, and an annual filing fee. Sometimes paid registered agents are used. Nonprofits must register to do business in other states in which they have a presence.
• The organization must pay local and state property, income, sales and other taxes in many jurisdictions.
• The association usually will desire IRS recognition of its tax-exempt status. An application to the Internal Revenue Service is required, which includes an application fee (currently $465), plus administrative time and effort involved, and additional legal fees.
• By the time that tax-exempt status is recognized by the IRS, most nonprofits have expended a few thousand dollars, often before any fundraising has begun.
• Few nonprofits can survive without systematic fundraising -- even with completely volunteer staffs. Compliance with postal regulations and seeking to mail at third-class nonprofit rates involves time, effort, and sometimes legal fees. Direct mail consultants must comply with state charitable solicitation laws and then pass on those costs in their fees
• Fundraising subjects the fledgling nonprofit to the charitable solicitation statutes of the various states, counties, and municipalities. To mail out (or conduct by telephone) a nationwide fundraising solicitation &endash; even where the fundraising is incidental to the transmittal of an important programmatic message &endash; the potential costs are enormous. The requirements include:
1. Determining the various state, county and municipal requirements, filling out forms, making and gathering copies of required documentation, and filing with the jurisdictions, often paying an attorney or accountant to assist in the process;
2. Paying several thousands of dollars in registration fees (for example, in 1994, potential registration fees in five states alone, Maryland, New York, Pennsylvania, Tennessee, and Virginia, were almost $2,500).
3. Spending substantial administrative time and paying CPAs to conduct an independent audit of the organization's books and records, required by the charitable solicitation statutes of many jurisdictions.
4. Repeating the above process every year.

The Free Speech Coalition, Inc. is a nonpartisan, nonprofit 501(c)(4) 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.