Vol. VIII, No. 3• November - December 2000

Regulating the Internet
The National Association of State Charity Officials (NASCO) held its annual conference on October 16th in San Diego. The meeting focused on NASCO’S "Charleston Principles" (which sprang from NASCO’s 1999 annual conference in Charleston, SC) to govern state regulation of charitable solicitations made on the Internet. The Charleston Principles have been published for public comment and NASCO intends to finalize them in early 2001.

NASCO claims to recognize the current plight of nonprofit groups that are forced to register, to pay fees and to be exposed to repetitive regulatory restraints in at least 38 states and other jurisdictions. Nonetheless, in an informal vote, the meeting participants voted overwhelmingly for the states to extend their regulatory reach to web sites and e-mails that ask for charitable solicitations. Further, the NASCO participants concluded the meeting by adopting the Charleston Principles which, if used in all different jurisdictions, would force nonprofits that solicit or collect contributions on the Internet to register in an infinite number of localities.

Karl Emerson, president of NASCO and director of Pennsylvania’s Charities Bureau, opened the meeting by referring to the pre-meeting comments filed by participants, including FSC members, complaining about the burden of registration. Other state officials also acknowledged this burden and supported measures to streamline the process. It appears that the previously filed legal challenges and objections to the burdensome registration process made by the nonprofit community are at least making the states acknowledge the problem.

Mr. Emerson said NASCO’s goal is to set up an Internet based registration system so that a nonprofit would be able to access one web site where it could register in all of the participating states. The site would also allow a nonprofit to fill out its Form 990 on-line. While some constitutional and jurisdictional questions would still remain, an on-line registration system requesting reasonable information on nonprofits could be a significant step toward reducing the burden of registration. As the state officials acknowledged, the current burden of filing the same paperwork in state after state benefits no one, particularly if the same information is already on the Internet (the nonprofit Guidestar organization is already providing 990 information on www.guidestar.org). Some states indicated they would rather use their departments to chase fraud rather than to chase paperwork violations. NASCO officials said the use of the Internet for on-line registration could also apply to fund raising counsel and solicitors in the future.

FSC members had met with the Virginia Attorney General’s office the week prior to the NASCO conference to address the burden of registration and the possibility that the Internet could be used to reduce the problem. The suggestion was made that a nonprofit or a fundraising counsel could be permitted to register only in its home state and then that information could be shared electronically. Apparently, NASCO intends to work with the Urban Institute to develop a similar model. A number of states, including Virginia and Pennsylvania, have expressed interest in the program.

ATA Lawsuit Challenges USPS Cooperative Mailing Rule
American Target Advertising ("ATA") is in litigation with the government regarding the validity of certain Postal Service subpoenas. ATA’s suit, which is currently before the U.S. Court of Appeals for the Fourth Circuit, challenges both the legality of the subpoenas and the Postal Service’s extension of the Cooperative Mailing Rule to include analysis of the business relationship between nonprofits and fundraising vendors.

The case arose in January 1998 when the Postal Service first subpoenaed documents regarding ATA’s contracts and business relationships with three nonprofit clients, alleging a possible fraud against the Postal Service under the terms of the Cooperative Mailing Rule. The Cooperative Mailing Rule provides that qualified nonprofit organizations may only mail their own matter at the special nonprofit rates, and that the nonprofit’s authorization to mail at these rates may not be used by others for the mail of such other non-authorized entities.

However, the Postal Service’s subpoenas did not seek copies of the material mailed by these nonprofits. Further, the Postal Service did not claim that the mailings included advertisements for any product or service, or any matter belonging to a for-profit, or that the mailings promoted any service or product of a for-profit. Instead, the Postal Service sought to enforce its expansive interpretation of the Cooperative Mailing Rule that is not based either in a statute or even a regulation. The Postal Service could only cite to a guidance booklet known as Publication 417, "Nonprofit Standard Mail Eligibility," as authority for its investigation of ATA under the Cooperative Mailing Rule.

ATA refused to comply with the Postal Service’s subpoenas. It argued that the Postal Service’s interpretation of the Cooperative Mailing Rule was contrary to statute, and therefore the Postal Service’s subpoenas of ATA were not issued for a legitimate purpose.

The government filed suit in federal court seeking to have the subpoenas enforced. In support of its position that the mailings complied with the Cooperative Mailing Rule, ATA presented evidence from a former head of the Postal Service’s classification division that the mailings complied with the rule and argued that the subpoenas are not enforceable as a matter of law. However, the district court upheld and enforced the subpoenas.

ATA has complied with the subpoenas, but has appealed the decision. In its appeal, ATA challenges both the legality of the Postal Service’s interpretation of the Cooperative Mailing Rule, and the authority of the Postal Inspection Service to issue the subpoenas at issue. ATA also appealed the trial court’s refusal to permit discovery on the Postal Service to see if an improper purpose had animated the Postal Service’s investigation.

USPS Issues Deceptive Mail Regulations
The Free Speech Coalition, Inc. ("FSC") filed comments on proposed regulations published by the U.S. Postal Service governing administrative judicial proceedings for mailings involving false representations or lottery orders. The Postal Service stated that it received two sets of comments on the proposed regulations, but did not accept any suggested changes to the proposed rules.

FSC had challenged the proposed regulations’ provision delegating subpoena power to Postal Service employees presiding over the administrative judicial proceedings. FSC had observed that the statute had expressly granted the Postmaster General authority to delegate the power to issue subpoenas, without granting similar authority to the Judicial Officer. In response, the Postal Service determined that Congress had intended to limit the Postmaster General’s power to delegate the issuance of subpoenas, but intended no limitation on the Judicial Officer’s power of delegation to "a high-level and independent official under his supervision."

FSC had also challenged the proposed regulations’ provision allowing the Judicial Officer to seek enforcement of the subpoena in federal court, noting that the statute had given this authority expressly to the Postmaster General alone. In response, the Postal Service asserted that the statute did not explicitly limit this authority to the Postmaster General, and that "it makes sense that the authority to seek enforcement of a subpoena should be delegated to the Judicial Officer absent a specific limitation on that authority by Congress."

Finally, FSC had challenged the proposed regulations’ provision allowing subpoenas to be issued without the presiding officer knowing what specific documents would be subpoenaed. In response, the Postal Service stated that the party subject to the subpoena can always bring a motion to quash the subpoena.

New Law Requires IRC 527s to Report Donors
It did not take long for the Deceptive Mail Prevention and Enforcement Act to become a political football in an election year. In April, Rep. Carolyn Maloney (D-NY) directed the Postal Service to investigate a Republican National Committee fundraising letter sent to party members. The envelope included the words "REPUBLICAN CENSUS DOCUMENT INCLOSED." In her letter to Postmaster General Henderson, Rep. Maloney acknowledged that the letter "does not resemble an official census questionnaire," but observed that it also failed to clarify that it "has no connection whatsoever to the 2000 Census."

Unsurprisingly, the Postal Service refused to levy a $1 million fine or place a stop mail order on an organization as well-connected as the Republican National Committee. (Those penalties are reserved for nonprofits which are less powerful.) A spokesman for the Postal Inspection Service intoned that the fundraising letter "does not fall under the category of what we could consider to be a deceptive mailing or a government look-alike mailing" — another shining example of the Postal Service’s objective application of a bright line standard. (News reports noted that an individual in Montgomery County, Maryland enclosed funds in the RNC return envelope along with the official census response. In the past, Postal ALJs have been known to apply a standard that, if even one person could be confused by the solicitation, the solicitation constitutes deceptive mail.)

FSC Submits Testimony Against Abuses by Postal Inspection Service
FSC submitted testimony with respect to abuses by the Postal Inspection Service. The testimony can be found on the web site of the Subcommittee on the Postal Service, Chairman John M. McHugh, http://www.house.gov/reform/postal/hearings/hearings106.htm.

United Cancer Council Case Settled
TThere are published reports that the litigation between the United Cancer Council ("UCC") and the IRS has been settled. FSDEF had taken a supporting role in the UCC litigation, providing financial support for UCC’s legal defense (in an effort to defend nonprofits from the application of a new, expansive regulatory attack by the IRS) after the IRS had forced UCC into bankruptcy. The IRS had used the UCC litigation to pursue an aggressive legal theory — that a nonprofit’s contractors could be charged with private inurement (improper benefit to those who run the nonprofit organization), which is a basis for revocation of the nonprofit’s tax-exempt status. In the UCC case, the IRS agreed that the contract between UCC and its fundraisers had been negotiated at arm’s length, but decided the contract’s terms had been too generous to the contractor, and therefore retroactively revoked UCC’s tax exempt status. A Tax Court decision approved the IRS action.

However, last year the U.S. Court of Appeals for the Seventh Circuit, in a blistering opinion, reversed the Tax Court decision. The Court of Appeals attacked the IRS’ legal theory in this case as making "the tax status of charitable organizations and their donors a matter of the whim of the IRS." (Emphasis added.) It stated that the inurement provisions in federal tax law are "designed to prevent the siphoning of charitable receipts to insiders of the charity, not to empower the IRS to monitor the terms of arm’s length contracts made by charitable organizations with the firms that supply them with essential inputs, whether premises, paper, computers, legal advice, or fundraising services." (Emphasis added.)

Under the reported terms of the settlement with the IRS, UCC reapplies for and regains its tax exempt status. However, UCC was required to promise that it will no longer raise funds from the general public. UCC may only receive unsolicited donations, such as bequests, and must transmit such proceeds to local cancer organizations (IRC 501(c)(3)s) solely for the provision of direct care to cancer patients. Any assets remaining after its bankruptcy estate will also be transferred to such local cancer organizations. The IRS’ $174,290 assessed deficiency (for 1986 and 1987) was reduced to $70,000, and no further deficiencies will be assessed. UCC’s tax exempt status for 1986-89 remained revoked, but the IRS agreed not to disallow the deductibility of charitable contributions made to UCC during this time period.

The IRS required the closing agreement to be provided to tax news services (including Tax Analysts and the Bureau of National Affairs). According to counsel for UCC, the agreement was required to be part of UCC’s new application for exemption, and thus would become part of the public record in any case.

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 theirgovernment 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.

Free Speech Coalition, Inc. ! 8180 Greensboro Drive, Suite 1070 ! McLean, Virginia 22102-3860
William J. Olson & Mark B. Weinberg, Legal Co-Counsel ! Richard B. Dingman
(703) 356-6912 (phone)! (703) 356-5085 (fax) ! http://www.freespeechcoalition.org! freespeech@mindspring.com