Vol. VII, No. 2March - April 1999

FSC Comments On Proposed Intermediate Sanctions Regulations
On March 17, 1999, Free Speech Coalition ("FSC") Legal Co-counsel Mark Weinberg, Esquire, testified before the Internal Revenue Service on its proposed Intermediate Sanctions regulations. Weinberg discussed how the proposed regulations would expand the definition of disqualified persons far beyond the statutory definition; establish a regulatory preference that nonprofits bring in-house the provision of fund-raising and other expert services; and impose unrealistic and discriminatory revenue-sharing rules.

Weinberg discussed how the proposed definition of "insider" -- applying a "facts and circumstances" test -- had been repudiated by the U.S. Court of Appeals for the Seventh Circuit's February 1999 decision in United Cancer Council v. Commissioner ("UCC"). In the UCC case, the IRS had declared vendors (under an arms-length contract) to be insiders because it felt the contract had been too favorable. The Tax Court agreed, but the Court of Appeals reversed. The UCC case was funded by the Free Speech Defense and Education Fund, FSC's sister organization. Weinberg's comments were featured in the April 1999 The Exempt Organization Tax Review and the April 16, 1999 Exempt Organizations Reports Tax Exempt Advisor.

AICPA Rejects FSC Request For Reconsideration Of SOP 98-2
On January 6, 1999, FSC -- joined by the Direct Marketing Association Non-Profit Council and by the National Society of Fund Raising Executives -- formally requested that the American Institute of Certified Public Accountants ("AICPA") reconsider its Statement of Position ("SOP") 98-2. This Request for Reconsideration was endorsed by the Alliance of Nonprofit Mailers in a subsequent letter to the AICPA.

FSC has learned that the Request for Reconsideration seems to have fallen on deaf ears at the AICPA. On the other hand, a few congressional offices have shown interest in learning why the AICPA and FASB have implemented rules which require erroneous financial statements. FSC leadership is now considering a variety of possible avenues to challenge SOP 98-2. Pursuant to this effort, an extensive review of materials received from the AICPA is underway.

FSC Comments at FEC Hearing On Proposed Definition Of “Membership”
On March 16, 1999, FSC Legal Co-counsel William J. Olson, Esquire, participated in public hearings on the Federal Election Commission's ("FEC") efforts to redefine who is a "member" of a "membership organization" in regulations implementing the Federal Election Campaign Act of 1971. The FEC's current definition was found to unduly burden organizations' First Amendment rights, and was struck down by the U.S. Court of Appeals for the District of Columbia Circuit in Chamber of Commerce of the United States v. FEC, 69 F.3d 600 (D.C. Cir. 1995).

Olson supported the adoption of the proposed regulations, with changes. Among other changes, he argued that (i) a membership organization should be able to waive the dues criterion in appropriate instances according to predetermined specific criteria (such as financial hardship) approved by the organization's governing body and (ii) the definition of membership organization should reflect, rather than reject, state law definitions of "membership organization" and "member." In addition, Olson discussed how the proposed requirements that membership organizations make all of their formal organizational documents (articles, bylaws and the like) available to members, and that such organizations amend their governing documents, would be burdensome. Olson also criticized the requirement that there be a strict annual affirmation of membership.

FSC Supports Revision Of FEC’s Express Advocacy Regulations
On March 5, 1999, FSC filed comments with the FEC in support of a Petition for Rulemaking seeking revision of the definition of "express advocacy" in the FEC's regulations to reflect recent court decisions. The Federal Election Campaign Act ("FECA") prohibits corporations, including nonprofits, from engaging in express advocacy.

Currently, the FEC regulations define express advocacy as including communications which -- when taken as a whole and with limited reference to external events -- a "reasonable person" could only conclude advocate the election or defeat of one or more clearly identified federal candidates. FSC's comments pointed out that such communications are not express advocacy under the FECA, and that the federal courts have rejected this definition. For example, the U.S. Court of Appeals for the Fourth Circuit (in the case Federal Election Commission v. Christian Action Network) described the FEC's interpretation as "foreclosed by clear, well-established Supreme Court case law," and stated that "it is apparent from the Commission's selective quotation from and citation to those authorities that the agency was so aware." The court concluded that "the Commission's position, if not assumed in bad faith, was at least not 'substantially justified…"

At its April 29, 1999 public meeting, the Commission rejected the Petition for Rulemaking on a 3-3 vote. Four Commission votes are needed to initiate a Notice of Proposed Rulemaking.

Speech Regulators Routinely Violate The Federal Privacy Act
By Michael Boos, Esquire
Although the Federal Privacy Act generally prohibits government agencies from denying any individual a right, benefit, or privilege provided by law because of such person's refusal to disclose his or her social security account number, a number of state agencies that regulate charitable solicitations routinely violate the law by requiring the nonprofit officers and their fundraisers to disclose their social security numbers as a pre-condition to soliciting contributions.

The Federal Privacy Act makes it "unlawful for any Federal, State or local government agency to deny to any individual any right, benefit, or privilege provided by law because of such individual's refusal to disclose his social security account number." There are only two exceptions to the prohibition on mandatory disclosure. A Government agency can require disclosure of the social security number if disclosure is "required by Federal statute," or if disclosure is required by an "agency maintaining a system of records in existence and operating before January 1, 1975." Moreover, any government agency that requests an individual to disclose his or her social security number is required to "inform that individual whether that disclosure is mandatory or voluntary, by what statutory or other authority such number is solicited, and what uses will be made of it."

Despite the unambiguous language of the Privacy Act, at least three state regulatory agencies demand disclosure of the social security numbers of the officers, directors, and other leaders of nonprofits or fundraisers as a part of the agency's registration and/or licensing process.

Schedule A of Tennessee's "Application for Registration of a Charitable Organization" requires an applicant to disclose the social security number of the organization's "control persons" -- the chief executive officer, chairperson of the board of directors, chief fiscal officer, and persons holding a similar position. According to the application, disclosure of the social security number is mandatory; failure to include the information could subject the applicant and persons signing the application to a $5,000 fine.

Utah's Division of Consumer Protection demands disclosure of the social security numbers of at least two officers or directors of a soliciting nonprofit organization as a pre-condition to registration. According to the agency's chief enforcement counsel, the Division demands this information pursuant to a catch-all clause in the state's charitable solicitations act which authorizes the Division to require disclosure of any information required by the Division's rules.

New York requires professional fundraisers and fundraising counsel to disclose the social security numbers of their officers and directors. The attorney general claims that disclosure of the numbers is required by the state's tax law and that the information will be used "to enable the Department of Taxation and Finance to identify individuals, businesses and others who have been delinquent in filing tax returns or may have understated their tax liabilities and to generally identify persons affected by the taxes administered by the Commissioner of Taxation and Finance."

These demands of Tennessee, Utah and New York regulators that social security numbers be disclosed as a pre-condition to lawful solicitation of charitable donations appear to violate the Federal Privacy Act. Neither Tennessee nor Utah has revealed the statutory basis for their disclosure requirements or how the numbers will be used. No federal law apparently requires disclosure of a social security number for purposes of regulating charitable solicitations. The states cannot claim that disclosure is required pursuant to a system of records operating before January 1, 1975.

New York purports to require disclosure of the social security number in order to enforce the state's tax laws. While federal law allows the states to require disclosure of an individual's social security number in order to enforce the state's tax laws, New York's tax law does not appear to require disclosure of the social security numbers of the officers and directors of a corporation that is licensed or registered with a state agency. Section 5.2 of the New York tax law requires disclosure of the federal tax identification number or social security number, as the case may be, of the entity that is seeking a license from a state agency. The tax law does not require disclosure of the social security numbers of the officers, directors or executive employees of the licensee.

Ironically, the Tennessee, Utah and New York regulators are among the most aggressive enforcers of charitable solicitation laws. Regulators in these states are quick to impose civil fines and other penalties against nonprofit organizations and their fundraisers for minor technical infractions. This lawlessness of these same regulators is shocking.

California State Appeals Court Decisions Question Constitutionality
Of Mandatory Disclosure Law
In a decision overturning a judgment against the Howard Jarvis Taxpayers Association ("HJTA"), the California Court of Appeal questioned the constitutionality of mandatory campaign disclosure provisions in California's Political Reform Act of 1974 ("PRA"). McCauley v. HJTA, 68 Cal.App.4th 1255 (1998). HJTA had been the target of a private party "bounty hunter" action brought under the PRA, claiming more than 30 reporting violations. After a three-month trial, the plaintiff received a million dollar judgment against HJTA based on the failure to properly report expenditures and contributions regarding a single mass mailing on a California ballot initiative.

The Court of Appeal reversed the decision on statute of limitations grounds. However the court observed that the U.S. Supreme Court's 1995 decision in McIntyre v. Ohio Elections Commission "[r]aises thorny problems concerning the constitutionality of [the PRA]." HJTA was successfully represented by Los Angeles attorneys Lawrence J. Straw, Jr. and Paul T. Gough.

Later, the same court, in Griset v. Fair Political Practices Comm., 69 Cal.App.4th 818 (1999), held the PRA's requirement -- that candidates for public office and individuals or groups supporting or opposing a candidate for public office identify themselves -- to be unconstitutional. Citing McIntyre, the court held that "[t]he state's informational interest does not outweigh the tremendous importance of anonymous political speech in American history."

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. However, contributions to the Free Speech Defense & Education Fund, Inc., a 501(c)(3) public charity, are tax-deductible.