Policy Report III: Federal
Regulations
Moderator:
William J. Olson, Esq.
Co-Counsel, Free Speech Coalition
Non-Governmental Challenges: The AICPA and the
BBB's
Mark Weinberg, Esq.
Co-Counsel, Free Speech Coalition
The Latest IRS Regulations
Judy Richmond, Esq.
Assistant General Counsel, U.S. Chamber of Commerce
The FEC and "Who Are Members?"
James Bopp, Jr., Esq.
Bopp, Coleson, & Bostrom
Advocacy Groups' Right to
Make Independent Campaign Expenditures
Dick Larkin
Technical Director, Price Waterhouse
An Accountant's View
WILLIAM J. OLSON, ESQUIRE
CO-COUNSEL, FREE SPEECH COALITION
MR. OLSON: We are going to begin. First,
let me introduce myself. My name is William Olson. I am an
attorney in Northern Virginia. I'm serving as legal
Co-Counsel to the Free Speech Coalition. The very first, if
you have the agenda with you, you will see that we have five
people. So, we have ten minutes each and some time to
wrap-up.
We will start off with someone else. I
will finish up because then I can expand or contract my
comments to the available time. I'd like to start off by
introducing Mark Weinberg. Mark is an attorney with the firm
of Weinberg and Jacobs in Maryland.
He is an expert in the area of tax-exempt
organizations, spent six years in the Chief Counsel's Office
at the Internal Revenue Service, a graduate of the
University of Chicago Law School and Co-Counsel of the Free
Speech Coalition. So, Mark, can you tell us about the
Internal Revenue Service?
MARK WEINBERG, ESQUIRE
CO-COUNSEL, FREE SPEECH COALITION
MR. WEINBERG: Yes. Actually, I thought
I'd start out by asking you if you know what the Internal
Revenue Service and the Federal Election Commission have in
common these days? The answer to that is they both are very
interested in telling you who your members are and what
their rights may be in your organization, as I'm sure other
speakers today are going to fill you in on.
The Federal Election Commission is
concerned about who the members of non-profit organizations
are for purposes of making solicitations from these people
for contributions to political action committees. They
enforce their interpretation of what a member is through
criminal sanctions, which probably makes you very interested
in precisely what they think a member is.
The Internal Revenue Service, not to be
outdone, has recently advanced its own concept of what a
member is, in the context of imposing the UBIT, the
Unrelated Business Related Income Tax, on dues that are paid
by associate members who don't happen to meet their
definition of membership.
What is interesting about this is that
you have two government agencies interested in defining the
relationship among private individuals in a private
organization. In essence, in my view, interfering with the
rights of free association simply because they have the
power to do so.
When you consider that they are embarking
upon this venture using both criminal sanctions and the
ability to impose income taxes and use their enforcement
powers to backup their definition, that, to me, is of great
concern. As you may have guessed, I'm trying to fill you in
on what is happening at the Internal Revenue Service.
I should point out that there are a great
many very interested and competent technicians at the
Internal Revenue Service who have worked for decades to try
and understand the non-profit community. From time-to-time
they are somewhat misguided in their attempts. I think it is
our obligation to point out to them when that has
happened.
Another, in my view, misguided effort on
their part or a misstep on their part has to do with their
current enforcement of the over 1993 legislation which, in
essence, denied deductibility of lobbying expenses and also
disallowed the deductibility of those portions of dues that
are used for lobbying expenditures.
This should really pose no problem to
501(C)4 organizations, many of which are represented here
today, because as you all know, we have been required for
some time to tell everyone, on God's green earth, the
contributions to our organizations are not tax deductible.
We have to put that in writing on solicitations. We have to
tell everybody, don't deduct your dues payments. Don't
deduct contributions that you make to us.
The law specifically provides that if
there is a reasonable basis to conclude that people are not
deducting their payments to you, that the organization
should be out from under all of the regulatory requirements.
It has already been explained to you that they are legion.
Having to capture the costs of lobbying from your overall
costs, keep track of that; break it down as to each
particular member; make estimates of what it is going to be
for future years, then notify everybody. It is a
nightmare.
Why should 501(C)4 organizations have to
live with that when in fact Congress has told us that we
should tell the world that contributions are not tax
deductible? Well, the IRS is willing to go halfway. The IRS
is concerned that business groups are going to, instead of
creating trade associations, begin masquerading as social
welfare groups.
In other words, I can see it now that the
Chamber of Commerce is instead going to start passing itself
off as a 501(C)4 social welfare organization. Well,
theoretically, it is possible that some group might do this.
I suppose it is even possible that they might slip through
the nets at the IRS. When they put in their form 1024, IRS
might not be able to tell that this was really a business
group.
If that's the case, then we have to ask
ourselves, how are we going to stop that hypothetical
problem? IRS has said, well, we've got an idea. If the
organizations' dues are under $50 per year, then that
organization will not be subject to all the regulations. I
guess because they figure if you are a business person, you
definitely want to pay more than $50 to belong to the
organization.
The IRS, I spoke with them just yesterday
on this point, is willing to say that well, perhaps we can
boost the number. When I suggested to them well, perhaps
what you should say is that any (C)4 organization that tells
all the world that contributions to them are not tax
deductible would be considered to be in compliance with
us.
After all, if anybody is not dealing in
good faith, it would be the member who is deducting what
they have been told not to deduct in the first place. They
weren't buying any of that. As a result, you will probably
see in the press, sometime between now and the end of the
year, a special exception. It will probably come out in a
revenue procedure form. You will probably feel deep down
inside that this is really good because as long as your
organization keeps its dues under $50, you are not going to
have to comply with these rules. Realize what is happening.
It is the same thing that was happening in the first example
I gave you. Government is telling you what the rights of
your various members should be.
For example, in that first example, both
the FEC and the IRS are enamored at the idea of members
being able to elect directors and to vote on matters of
substance within the organization. What that means is, a
person who is happy to give you their money, read your
literature, attends your meetings, and write letters to
Congress is not a member because of the fact that they don't
have some of these key elements of membership.
The same thing is happening here. As long
as you keep your dues low so that you either go out of
business or you have to raise tremendously large numbers of
members, as long as you will submit to this regulation you
will pass our muster. The medium is the message. What's
going on here, they're regulating your freedom of
association.
I'm sure the technically accurate
response that I got to my question before, about the $215
solicitation information, is the medium is the message here.
We are slowly, little-by-little, losing the freedom of
association by allowing ourselves to be regulated to death
on these items.
I think that what you will find is that
for 501(C)4 organizations who do not need that status in
order
to get favorable mailing privileges, the
day is rapidly approaching when they will be better off not
seeking tax exemption at all. That the hassles of being
tax-exempt are greater than any benefits that could be
associated with that. That's about all I have time for.
Thank you.
MR. OLSON: Well, that is a topic that we
have talked about before, and that would certainly undo a
lot of the existing law if we started operating as
for-profits. It is an interesting twist on things. At least
the IRS has been willing to meet with us and accept our
technical input. So, we appreciate that.
Now, we switch from tax law to election
law. We have two speakers on that topic. We want to begin
with Judy Richmond, who is Associate General Counsel of the
U.S. Chamber of Commerce. Judy went to George Washington
University Law School and has been 15 years on the staff at
the Chamber of Commerce and works on many, many issues
involving non-profit organizations. We are regularly in
touch with her and her staff. Judy.
JUDY RICHMOND, ESQUIRE
U.S. CHAMBER OF COMMERCE
MS. RICHMOND: Thanks. The topic that I
have been asked to talk about is this revelation that Mark
mentioned which defines the term "member" of a membership
organization.
What I am planning to do is to briefly
describe this rule to you and explain how it has affected
the political programs of organizations such as the U.S.
Chamber. I'd also like to tell you a little bit about our
experiences with the Federal Election Commission, and to
tell you a little bit about a lawsuit that the Chamber and
the American Medical Association will be filing very shortly
challenging this new regulation.
As I mentioned, this rule defines the
term "member" of a membership organization. The reason why
we care about this rule at all or the definition at all is
because under the Federal Election Campaign Act, membership
organizations are permitted to communicate with their
members on partisan political issues. They can do this using
their general treasury funds as opposed to their political
action committee funds.
Now, the statute doesn't define the term
"member." They have left this to the discretion of the
agency. For many, many years the FEC defined the term
"member" as all persons who were currently satisfying the
requirements for membership in the organization.
Basically, the organization set its own
standards of membership criteria and decided on its own who
its legitimate members were. Organizations were able to
distribute endorsement reports and other partisan
communications to their members; all of whom satisfy very
specific requirements, including the payment of membership
dues.
Now, effective November 10th of last
year, the Commission enacted a new membership rule, which
provided that membership associations could only communicate
or engage in partisan communications with only those members
who either had the right to vote for at least one member of
the organization's highest governing body; in other words,
its Board of Directors, or it could communicate with those
members who had a significant financial attachment to the
organization above the payment of membership dues. Paying
dues alone didn't count.
The FEC stated they needed to amend this
rule because they were getting too many requests for
advisory opinions under the old rule; basically for
administrative convenience. They also based this new
regulation on a 1982 Supreme Court case, FEC v. National
Right To Work Committee, where the issue was whether the
Right To Work Committee had illegally solicited persons that
it considered as members.
The Supreme Court ultimately found that
the Right To Work Committee was not a membership
organization, but under a very limited and unusual set of
facts, which are not applicable to most membership
organizations today, including the U.S. Chamber of
Commerce.
In any event, we now have this new rule.
It posed a significate problem for my organization because
facially, U.S. Chamber members did not appear to qualify as
members for purposes of the election laws. That's because
under the Chamber By-Laws, our members don't have a right to
vote for directors.
We have a self-perpetuating board of 63
individuals. They vote each other in. Members do not vote
for directors. I might mention that our members do have a
significant role in the formulation of our organization's
policy, which we consider to be a far more important right
than merely the right to vote for one member of a Board of
Directors.
We made that argument to the FEC during
their rulemaking process. They were unimpressed and rejected
it. So, if you have the right to vote on policy, it doesn't
count. The FEC's other criteria for membership that I
mentioned, namely, if you have a significant attachment to
the organization, other than the payment of dues, concerned
us.
We were confused because they don't
really tell you how much more, in excess of regular dues,
you have to pay in order to satisfy this problem of the
test. What does significant mean? We have members who pay
$100,000. Is that significant?
So, we filed an advisory opinion request
with them asking them to tell us whether any or all of our
220,000 members qualified as members for purposes of
election laws. At the same time, we terminated the
distribution of our endorsement report to our members and
all other partisan communications to our members because the
rule did appear to apply to us on its face. We were
unwilling to risk an enforcement action with the FEC.
The Commission's General Counsel prepared
a draft advisory opinion stating unbelievably that for
purposes of the Act, the U.S. Chamber of Commerce had only
63 members, the members of our Board of Directors, rather
than the 220,000 members that currently pay dues to our
organization.
They based the decision on the fact that
the Chamber members don't vote for members of our Board and
they said that none of our members have a significant
financial attachment to the organization. The Commission was
unable to get enough votes to approve this draft opinion and
they deadlocked 3/3 along party lines.
They sent us a letter telling us they
couldn't decide and the matter was closed. So, after four
months of providing the FEC with detailed information about
our membership, about our dues structure, about our Board of
Directors, we were no more knowledgeable about the
application of this new rule to our organization, than we
were when we had started. The most frustrating part of it
was that the Commission itself had voted in this rule less
than a year before, yet, they couldn't interpret it for us.
I might mention that the FEC also deadlocked on the
membership issue in two other cases, a question filed by the
American Medical Association and also one by the
International Council of Shopping Centers.
As I mentioned in my opening statement,
the Chamber and the AMA are going to be filing a complaint
next week challenging the rule. We are basically challenging
the fact that the rule is inconsistent with the statutes and
the legislative history, and that it violates the Chamber's
and the AMA's First Amendment Rights to engage in core
political speech and to associate with our members.
We are asking the Court for injunctive
relief and we are hopeful for a favorable ruling so that we
can start talking to our members again.
MR. OLSON: We had the pleasure of filing
comments on those regulations when they were proposed.
Testifying at the FEC, I remember Jim Bopp being there and
others. We have several people who are lawyers and
accountants in the group, who seem to wind up in the same
place at the same time representing different clients. On
that one, we explained to them all of those things. They
said, well, they urgently had to interpret and implement the
National Right To Work Committee case which was decided in
1982. This was 1992 that they proposed the revisions. They
said, we can't wait any longer. We just have to act
now.
In any event, our next speaker, also on
election law matters, is Jim Bopp. Jim is with the law firm
of Bop, Coleson and Bostrom in Terra Haute, Indiana. He is
General Counsel of the National Right To Life Committee. He
has handled much litigation from coast-to-coast with respect
to abortion, infanticide and euthanasia, as well as other
First Amendment issues.
He recently has a victory in the election
law area that he is going to tell us about today, which will
make his law school at the University of Florida proud of
him.
JAMES BOPP, ESQUIRE
BOPP, COLESON, & BOSTROM
MR. BOPP: Thank you. In dealing with the
Federal Election Commission, which is most of what I have to
talk about today, I have learned that even though you are
paranoid, it doesn't mean that they are not trying to get
you, as the Chamber has found out to their chagrin, I'm
sure.
What I want to talk about or asked to
talk about is the right of advocacy groups to make
independent campaign expenditures and to advocate issues
which may influence elections. What we are talking about
here is the influence of not-for-profit organizations on
elections, and the extent to which such influence may be
subject to government regulation or even outright
prohibition.
We are talking about what the
not-for-profit itself can do using its own general treasury
funds. If you answer the question that this influence is
subject to government regulation or prohibition, of course,
the effect of that is to then mean that, that activity has
to now move out from under the general corporate umbrella
and may only be done by a political action committee, with
all the attendant restrictions in reporting that are
attendant to carrying on PAC activity.
Now, if you look at the range of activity
that a typical not-for- profit may do that may influence an
election, you have a range that starts from simply
discussing issues, to discussing issues in the context of a
campaign where that issue may be relevant to that campaign,
to discussing issues as it relates to a particular
candidate; what position that candidate has on an issue, or
to the point of criticizing or praising candidates for the
positions that they adopt on issues, to finally, at the
other end of this spectrum, expressly advocating the
election or defeat of a candidate because of their positions
on those issues.
So, the question is, at which place along
this spectrum does the proper application of the Federal
Election Campaign Act kick in and, for that matter, whether
states, with respect to state elections, may impose
restrictions or prohibitions on the basic not-for-profit
corporation?
The Supreme Court and lower courts have
dealt with this issue in a series of cases from Buckley v.
Valajo in 1976 through a case decided this year in
September, 1994, which I will review for you. Now, there are
three key considerations that the courts have set- out,
starting with Buckley, in considering at which place along
this spectrum may the government intervene. One
consideration is that the distinction between issue
advocacy, on the one side, and election advocacy, on the
other side, is very difficult to determine in practice.
Whether or not a speech given by a person advocating an
issue ultimately results in an exhortation to vote or urging
to vote for the candidate is often very difficult to
determine. The courts are concerned that this distinction
and the protection of issue advocacy be maintained.
The second consideration is that issue
advocacy is protected from restriction because of its vital
role in our Republican form of government. After all, issue
advocacy really is not electioneering, but is more attendant
to petitioning your government and other general matters
that are legitimate to discuss that are non-election
related.
The third point that arises in these
cases, the third consideration, is that the court recognizes
that all of these activities, each and every one of them,
influences an election. So, they make no distinction based
upon what does influence and what does not, but there is a
recognition, expressed recognition, in Buckley v. Valajo
that all of these things influence elections. So, that
doesn't solve the question of where the line would be
drawn.
The Court in Buckley and then in MCFL
decided to draw, because of these considerations, a bright
line test. That is, that the Federal Election Campaign Act
cannot limit or restrict independent expenditures or may not
limit or restrict corporate expenditures in these cases
respectively, unless there are explicit words, remember that
language, explicit words, which expressly advocate the
election or defeat of a clearly identified candidate.
They used examples of explicit words:
vote for, support, defeat. This bright line test then was
satisfactory in separating what is viewed to be expressed
advocacy that is subject to the Federal Election Campaign
Act and issue advocacy that is none.
Now, in 1976 this was applied to the
independent expenditure provision in the original Federal
Election Campaign Act regarding a requirement that
independent expenditures are limited to $1,000, if they are
related to a clearly identified candidate. The court said
"related to" means expressly advocating the election or
defeat.
In 1986 in FEC v. Mass Citizens For Life,
the court held that the prohibition on corporate
expenditures in section 441(B), which said that a
corporation was prohibited from making any expenditure in
connection with any election meant expressly advocating the
election or defeat of a candidate.
In 1991, in Fousher v. Federal Election
Commission, the case that I handled, went to the First
Circuit. The First Circuit held that the Voter Guide
Regulations adopted by the Federal Election Campaign Act,
which prohibited corporations from doing voter guides that
discuss their positions on the issues that were being
surveyed in the voter guide, also ran afoul of this
expressed advocacy requirement.
Finally, interestingly in 1994, the FEC
v. Survival Education Fund, in the District Court, in a case
arising out of 1984 regarding Dr. Spock, who had the
audacity to send out a letter prior to the 1984 campaign
criticizing the Reagan policy on Nicaragua was also found
not to be expressed advocacy and that is required.
Now, what has been the FEC's response to
all of this? Well, nothing short of a fanatical obsession
with the notion that anything that influences any federal
election is subject to the regulation or flat prohibition.
Their position has been that expressed advocacy is not
required. That anything that influences is something that
they can deal with, despite this series of cases. After the
Fousher case, striking down their Voter Guide Regulations,
they decided that maybe they needed to do something in this
area and proposed renewed regulations, which did require
that there be expressed advocacy in voter guides. But then
in a move that would make George Orwell proud, defined
expressed advocacy to be issue advocacy.
Now, they would draw the line between one
and two. they would draw the line right after discussion of
issues. That any discussion of issues in the context of a
campaign, if you happened to be concerned about a bill in
Congress about an issue that is also an issue in the
campaign, you can't discuss it if you are a corporation that
influences the election and, of course, encompasses
everything else as you go down the line.
What you have is, if you have a
corporation that does expressed advocacy, then they are
subject to the prohibition of section 441(B), which
prohibits expressed advocacy by corporations, except; and
this exception was also found in the Mass Citizens' case.
That is, except that certain not-for-profit corporations
themselves, by using their own treasurers, may engage in
expressed advocacy.
The reason for this is, number one,
expressed advocacy is at the core of our electorial process
and the First Amendment. So, it is entitled to full First
Amendment protection. Thus, you have to find a compelling
interest to justify this prohibition on corporate, in this
case not-for-profit corporate, expressed advocacy.
The compelling governmental interest
which has been found in MCFL and in the Austin case
regarding the Michigan Chamber of Commerce is this interest,
to prevent "the coercive and distorting effect of immense
aggregations of wealth that are accumulated with the help of
the corporate forum and that have little or no correlation
to the public support for the corporation's political
ideas."
But note that it is related. The critical
point of that interest is that you must show that the
aggregation of wealth is unrelated to advancing the
political ideas of the corporation. Now, in MCFL, they took
a look at MCFL and found three features that in their view
qualified MCFL to the exemption from the prohibition on
expressed advocacy.
One, that it was formed with the
expressed purpose of promoting political ideas and cannot
engage in business activity.
Two, no stockholders or other persons had
a claim on their assets or earnings.
Three, it was not established by a
business corporation and had a policy not to accept business
contributions.
Well, the FEC and subsequently the State
of Minnesota viewed those exceptions to be very restrictive.
In other words, you had to literally be an entity that had
these characteristics in order to qualify for the exemption.
Which brings me to the case decided September 1, 1994;
Minnesota Citizens Concerned For Life v. Hollahan. Again, a
case I handled.
This case is a decision of the Eighth
Circuit, which in one of its parts, dealt with the exception
to this general prohibition on not- for-profit corporate
expressed advocacy. There, the State of Minnesota attempted
to put in the statute what the features of MCFL were that I
just mentioned. Of course, therefore, meaning that you
literally have to comply with each of those features.
MCCL was found not to comply with two of
those. The first is, they did not comply with the
prohibition on engaging in business activities. They did
engage in business activities. They sold ads in their
newsletter. They rented their membership lists. So, they
didn't qualify literally.
They also did not qualify with the third
requirement. That is, while they only accepted an
insubstantial amount of business contributions, they had no
policy prohibiting business contributions. Well, the Eighth
Circuit, in its opinion, found that in fact MCCL did qualify
for exemption and therefore struck this statute.
They did so on the following reasoning:
first, on the part of whether or not you "cannot" or "do
not" engage in business activity, they said, well, what we
mean here and what the court meant here was business
activity unrelated to your political ideas. Surely, when
somebody puts an ad in MCCL's newsletter or rents its
membership lists, it is motivated in doing that and
cognizant of the political ideas that they are supporting
and that they are advancing those political ideas.
As to the third one, you must have a
policy not to accept business contributions. They said,
well, you have got to look at the purpose of what that says.
The purpose, according to the Austin Court, was to prevent
the not-for-profit for being a conduit for business
contributions, as they found the Michigan Chamber of
Commerce to be.
Surely, when you have a not-for-profit
that has everyone, agreed, an insignificant amount of
contributions from business activities, that not-for-profit
is not a conduit. Thus, the court was simply identifying
features of MCFL that qualified them under the rationale of
rather than setting out a test that must be checked off, as
the FEC and the State of Minnesota was arguing. So, that's
the latest in this continuing saga. It's clearly not over
yet, as they say.
The changes that the FEC was proposing in
their draft regulations, some of which were part of the now
failed Campaign Reform Act; we expect the FEC to revisit
these again. We expect further efforts by other states, such
as we experienced in the State of Minnesota, to provide
similar restrictions on legitimate First Amendment
activities of these not-for-profits. Thank you.
MR. OLSON: Jim, I'm just going to
emphasize one point that you made and make sure that
everybody gets this. When the United States Supreme Court
decided the case of Massachusetts Citizens For Life and it
decided that the restrictions on corporations don't apply to
that kind of non-profit organization, it had certain
criteria.
When the FEC read those criteria and then
wrote regs based on those criteria, they wrote the regs in
such a way that even Massachusetts Citizens For Life could
not qualify as a Massachusetts Citizens For Life-type
organization under their regulations. When they don't like
the law, they don't give it a lot of respect.
Now that we have heard from four lawyers,
we get a CPA to perk up the afternoon. Our last speaker is
going to deal with a topic that we haven't had much time in
this conference or in the last conference to deal with, but
I'm sure that at a subsequent conference, we will spend more
time with this. It is the topic of private regulation over
non-profit organizations.
Our speaker is Dick Larkin. He is a CPA.
He is Technical Director of the Not-For-Profit Industry
Services Group, and the National Office of Price Waterhouse.
He is a Member of the Financial Accounting Standards Board,
FASB; Non-Profit Advisory Task Force; and he Chaired the
American Institute of Certified Public Accounts, AICPA;
Not-For-Profit Audit Guide Task Force.
So, from Harvard College to here, Dick
Larkin.
DICK LARKIN
TECHNICAL DIRECTOR, PRICE WATERHOUSE
MR. LARKIN: Thank you. I'm in a panel
labeled federal regulation. I'm not really a part of federal
regulation, but I didn't fit anywhere. So, this is as good a
place as any to go. Also, strictly speaking, accountants are
not regulators.
I appreciate that the information that we
are involved with, namely, an organization's financial
statement, in turn is used by regulators, both government
regulators, as in the State Charity Officials, and the
non-government. I'll call them quasi-regulators. Many people
call them watchdogs. They don't like that.
But anyway, the Charges Information
Bureau and the Better Business Bureau; they use the
information that we certify. I admit, we have an indirect
regulatory role, but it is not really the accountants
themselves who are doing this. I have given you a little
one-sentence in my outline which you have. That points out
that the Generally Accepted Accounting Principles, which we
deal with, do not themselves limit free speech in any way.
That would not be our role. We would not assume it. We leave
whatever limitation there is to be to others. All we do is
specify how the costs of the communication that you engage
in are to be reported in your financial statements, if you
want your auditor to be able to certify that, yes, your
statements are prepared in accordance with Generally
Accepted Accounting Principles, which in turn, as I said,
does lead to certain regulatory consequences if, for
example, your auditor does not so certify.
So, yes, it does indirectly affect your
fund raising ability. This is a more technical topic than
most. I'm going to give a short discussion of the accounting
rules in this area. I will not go into a lot of detail. I'll
be glad to take questions. I'll be glad to chat with any of
you individually afterwards.
Briefly, existing accounting rules are
contained in this document. It is called a Statement of
Position. It is issued by the American Institute of CPAs. It
sets forth accounting rules which clients must comply with,
if they want us to be able to say, yes, their statements are
in accordance with GAAP or Generally Accepted Accounting
Principles. This document was issued in 1987 after a very
long process, a very contentious process, going back and
forth. I won't bore you with that. Recognize that it was
controversial at the time. It is still controversial. With
some number of years of experience in using this document
under our belts, the accounting profession realize that it
could be improved.
So, they convened, or the Not-For-Profit
Organizations Committee of the Institute, got together and
decided to see what they could do to make this a better
document. What they have gotten to so far is this Exposure
Draft in a larger size. Don't take that as indicative of
anything. It is actually about the same length.
This Exposure Draft was published for
public comment about a year ago. The Institute has received
public comments. They are in the process of digesting those
comments. A final document will be out sometime, undoubtedly
not this year; probably sometime next year.
These documents deal with essentially
three issues. We are in the context now of what accountants
call allocation of joint costs and multi-purpose activities.
Your organization sends out usually a mailing. It could be
over the airways, but it usually is in the context of mail;
a message, something to do with your organization's program
and, by the way, please send money. That's the situation
that these documents are intended to deal with.
There are three issues or three parts to
the allocation process. First, whether or not it is
appropriate to allocate the so-called joint costs of this
activity. Given that you past that hurdle, then you are
faced with what costs are allocable and what method of
allocation do you use.
Now, the first two are relatively easy;
the what and how, so I'll deal with them first and get them
out of the way. As to what, the existing guidance doesn't
give you any guidance on that. It leaves you to your own
devices. The new proposed document gives some guidance. It
is very general. It is not intended to be terribly
restrictive. It says you can cover both production and
distribution costs, as well as applicable indirect
costs.
This would be costs of overhead of
organizations, staff spent supervising and creating the
documents in question. As to cost types, they just have a
laundry list of some of the obvious types: salaries,
postage, and so on.
As to how to allocate, this is
essentially a cost accounting question. It is dealt with in
college courses. It is dealt with in text books. It is dealt
with in accounting manuals. There is really nothing in
particular the accounting profession needs to say about
this, except to relate it to the particular situation; that
is, a joint mailing of this type.
SOP-87-2, the existing document,
essentially is also silent. Although, one can infer from it
that one should essentially take the content of the
activity, divide it into pieces, and allocate the cost
accordingly. The new SOP gets much more specific. It offers
three alternatives which are actually all variations on
dealing with the content, but it leaves it to each
organization to pick the most appropriate method of
allocation.
Take it that there are loopholes in any
allocation method you want to come up with. If I just tell
you, okay, you count the number of lines of print. If there
are one hundred lines of print of educational material, and
one hundred lines of fundraising, and you allocate it 50/50,
it is a simplistic approach. It doesn't take into account
the real world.
How do you account photographs, for
example? How do you take into account different type sizes
or empty space that is often used for effect to set-off a
message? How do you deal with the organization that does
what all of us whoever wrote college term papers love to do
and that is pad? You have a space to fill and you create
material to fill it.
You can see the motivation there if it is
just going to be done on accounting lines, you pad the
educational material and you shrink the fundraising
material. All of a sudden, you have a nice allocation. It is
not meaningful, but it looks nice. So, that's the practical
problem that accountants have in dealing with this issue.
Unfortunately, I'm the first to admit, there is no really
good way to deal with that particular issue.
So, I will pass on to the third one,
which is the contentious part of it, and that is whether to
allocate at all. That is, do you pass this first hurdle to
even get to the second ones? SOP-87-2 sets a default
condition that all costs are fundraising unless it can be
demonstrated. It requires demonstrating. That is the burden
of proof here, to use the legal terminology; that a bona
fide program function has been conducted. This requires, as
I note in the outline, verifiable indications of the
non-fundraising content, including, and this is a required
element, there must be a call for action. You can't just
give people what may be admittedly very useful material, but
unless you then urge them or exhort them to go do something,
based on this material, you failed this test.
This is an existing literature. Some
people argue with it, but I think most people realize that
if you are going to have any standard at all, you are going
to have to have some kind of standard like that. The other
part of it is, to whom are you sending this material? I will
affirm in my view that the proposed new standard does not
change the sense of this content of the existing
standards.
Some people disagree with me on this,
including some CPAs. Some non-profits disagree with me on
this, but I have read both very carefully. I have
participated in writing them. I truly believe that the sense
of 87-2 has not been changed. Some loopholes have been
tightened, maybe. We have firmed things up a little bit
around the edges, but I think the core of it is pretty much
still what it was. It is more specific. It sets forth
explicitly three criteria: purpose, audience, and content.
Purpose; there are some specific rules here. If, for
example, the compensation of the person conducting the
activity is based on funds raised. Such as a percentage, or
a bonus, or something like that. That's prima facia evidence
that it is a fundraising activity.
If, on the other hand, the activity is
something the organization also does in other ways a part
from any possible fundraising implications, that's an
automatic pass. You are okay on that. If you don't pass that
hurdle, however, you can still pass the bigger hurdle by
looking at other indicators such as I have noted
there.
How do you evaluate the success of the
activity? Who are the people who are performing the activity
and so on? I won't lecture on all of this. You can read the
notes. Those of you who really want to get into the details
should definitely get the original document.
The proposal has in it a flow chart. It
is near the very end of the document, that walks you through
all of these criteria; again, for those of you who are
really into this sort of thing and it gives examples. It
gives a number of examples of hypothetical situations and
the conclusions of the authors as to whether they pass or
fail the various tests.
The Institute received 300 comment
letters. So, it is taking them awhile to get through these.
It is considering them at this point. I have attached to my
outline a checklist of what I call a list of factors to
consider; recognizing that this, like other accounting
issues, is not black and white. There is not a bright
dividing line that says, okay, these guys pass and these
guys fail.
That there are going to be some fuzzy
situations; probably many fuzzy situations. People will need
to use judgment. So, my attachment, which goes on for three
pages, actually, half of which is footnotes, is designed to
help you make that judgment; recognizing that it is a
judgment. I call your attention to the middle of the bullets
at the top. No one of these factors is normally
determinative. That is, you can't just say, okay, we pass
factor two and therefore we are okay. You can't even just
add them up. Well, there are eleven factors. If we pass six
and fail five, then we pass. You can't look at it that way.
You have to look at the totality of the situation.
The IRS has a phrase that I love for
this. It says, all the facts and circumstances that you have
to look at in order to make these assessments. So, there is
the list of eleven factors with the yea and the nay factors
in each case. Some of them have footnotes. The footnotes are
probably or actually the more interesting part because this
is where I give you examples of specific types of things
that I think either help or hurt you in trying to conclude
that, yes, you do have a bona fide program activity.
I will stop at this point and take
questions at the appropriate time and turn it back to
Bill.
MR. OLSON: Thank you, Dick. We appreciate
your being here. We have taken significant steps to try to
have representatives of other views on the panel. Sometimes
that has not always been as easy as it might seem. Not
everyone wants to come into this den and have to face
questions, but we appreciate it takes willingness to do
that.
We also want to have a few things to say
about this. The Free Speech Coalition was one of those
300-plus opposition to the proposed regs to the Exposure
Draft. Many of you were some of the others. We put out quite
a bit of material at that time. I was encouraged to read in
Philanthropy Monthly -- is Henry Suhrke still here? I
commend him for a good article that Bob Frank prepared about
an analysis of those comments.
I was encouraged to see that of the
totality of the comments, 90 percent of them were against
the Exposure Draft. Of those which were filed by non-profit
organizations, 98 percent were against. It seems like a
significant plurality. Even those filed by CPAs, 71 percent
were generally against.
Again, for or against is a relative term
and there are many issues, but that was the general feeling
by the two CPAs who did that particular study. There is a
motivation to change the current rules in 87-2. Part of the
motivation came from state charitable election officials.
Some of it came from the private watchdog groups.
It is interesting that even among the
groups that one would expect to support this particular
revision, NCIB opposed it and the Connecticut Attorney
General's Office opposed it, at least in certain important
aspects that we have some unusual allies in this particular
case. I want to make one or two comments about it. I
appreciate very much Dick's outline because this is very
useful. The first comment is that I really have never
understood why if compensation is based on the funds raised
why that automatically renders the entire package,
irrespective of content, irrespective of purpose,
irrespective of anything else, why that automatically
renders it 100 percent fundraising? But that's what it does
under this rule.
In other words, the terms of the contract
with the fundraising company determine whether an accountant
in preparing financial statements classifies any of this as
something other than fundraising. Also, with respect to
audience, there is the rule that is set-out in the outline.
If selected primarily on ability to contribute, fail
audience criterion.
Well, why would you select people to
raise money from if they didn't have the ability to
contribute. That's got to be a factor unless you are asleep
at the switch. If you are doing it on that basis, then you
automatically, 100 percent of your costs, become
fundraising.
There are land mines in this despite the
fact that it was designed, as Dick says, I guess to simplify
things or clarify things. What it does in effect is
discriminate briefly against anybody who raises money in the
mail at all. I'll give you a chance to get back to me on
that and any other questions that might come in.
I want to mention one other thing. It is
something that we have included in our newsletter and in
separate mailings. It has to do with the Better Business
Bureau. Their Philanthropic Advisory Service has issued some
rules on point of solicitation disclosure. This is like the
Kentucky statute we've talked about earlier.
What they want is a clear statement in a
multi-purpose solicitation that advises the donor as to
whether any of the costs associated with that letter would
be considered program or educational by the organization
that is doing the mailing. In other words, they say it is
not good enough, even after the fact, for the accountants to
come in and classify it all as fundraising.
What we have to do is put some confusing
sentence into the fundraising letter which says, the
organization in question -- as a matter of fact, they even
give you the language. "Most" or "some;" you get to choose
between those two words, but the rest of it you don't get to
choose. Most or some of the cost of this appeal is regarded
by charity XYZ as a public education program rather than a
fundraising expense.
I'm not sure what percent of the average
recipients of that letter are going to fully appreciate what
that means. Out of context, I'm not sure whether that really
does inform them of anything. It is mandated words. It is, I
think, misleading. I think it is the kind of problems that
are going to force us next year when we come back again, if
the Freedom Forum will have us, to be able to discuss the
role that these private organizations, private watchdog
groups, are having on non-profits as well.
So, we have a few minutes for questions.
Anyone like to join in? Yes, sir? Start off right
there.
PARTICIPANT: Bill, I'd like to ask --
this is for the four lawyers. It is not meant to exclude
you, Dick, but that's the way education goes. It strikes me
as I listened to Judy that the real purpose of the FEC
definition of "member" is to in fact expose the membership
lists to full disclosure for this reason.
If you have an elected board member, the
maverick, under normal corporate law, is entitled to access
to your lists in order to solicit votes. If you bopped about
the significant contribution, how does the FEC determine
that in most cases without comparing the contributions of
all the contributors? In either case, your list has been put
before either the FEC -- the second example or to some
maverick who then has it. I mean, it could be a maverick
from a competing organization. It could be a maverick from
somebody disagrees with your program.
So, that the real purpose of this, since
it has no purpose whatsoever to the election law, really is
to get at your mailing lists, which I think we all agree is
a death mill for these organizations. Would the attorneys
agree with that assessment?
MS. RICHMOND: The FEC did not ask us for
our mailing list. We wouldn't have given it.
PARTICIPANT: No, no, because you don't
have an elected directors.
MS. RICHMOND: It is an interesting
thought. My feeling is that the whole basis for this rule is
based upon the FEC's total misunderstanding of how
associations work and how they operate. They are trying to
equate a member of a non-profit organization with a
shareholder. They are not equal.
PARTICIPANT: Of course, that's what
they're doing. I was on the House Administration Committee
when this whole thing got started.
MR. OLSON: Let me let Jim have a chance
to respond.
MR. BOPP: I think it is a more pernicious
motive than Judy is willing to subscribe to. I don't think
it is the one you are suggesting. I think that there is a
pervasive hostility in the Federal Election Commission to
political activity by non-party, non- candidates. That is,
not-for-profits, independent PACs, business PACs, labor PACs
-- not so much labor PACs. There is a pervasive hostility.
They are trying to concentrate electioneering in the hands
of the candidates, the parties and the media.
At the very same time they handed down
these proposed regulations on membership, which would have
had the effect not only of taking out the Chamber and the
AMA, but would have taken out the National Right to Life and
every other membership organization that I know of, in terms
of having any solicitation members.
At the very same time they handed down
these expressed advocacy proposed regs, which would have
forced all issue discussion in the context of an election
under a PAC. What's the effect of those two? The effect is,
you can't talk about issues, much less candidates and
issues, unless by your PAC. At the same time, as a
membership organization, you have no members to solicit in
order to get funds to carry on that activity.
MS. RICHMOND: Even if you did have
members, the burdens on associations, in terms of soliciting
their members, is so great. The Chamber has never done
it.
MR. OLSON: There are lots of problems
that come when the Federal Election Commission, which was
not designed to regulate non-profits, begins to regulate
non-profits. That raises all sorts of questions we have
never gotten into. We have time for one more question.
Anybody else? Jeff, in the back?
PARTICIPANT: I want to challenge Mr.
Larkin's opening sentence in his statement. You started out
by saying, unlike the prior commentators, you are not
involved in the regulation of free speech. I want to suggest
that that's not true.
In fact, I think you sit at the top of a
house of cards that is built on faulty premises that is
designed to regulate free speech. I think where you have to
start out is, you start out with the fact that there is both
private, state, and federal people who are involved in
trying to evaluate charities on the basis of percentage cost
of fundraising.
The NCIB uses that as a major criterion.
They, interestingly enough, are the major cause of the
whole
re-study of 87-2. Then the state
regulators, we've had example after example already given
today of states that have tried to reimpose, despite the
Radley decision and the other decision's trilogy that have
tried to reimpose this percentage limitation on fundraising,
despite what the Supreme Court says.
Then you have the federal government
doing the same kind of things through, for example, the
Combined Federal Campaign that will only admit to the
Combined Federal Campaign organizations whose percentage
costs of fundraising are below a certain amount. So, it is
clear that the percentage cost of fundraising is a major
criterion that's being used.
MR. OLSON: You've got to give Dick the
last couple of minutes or we are never going to get an
answer.
MR. PARTICIPANT: You then go into the
question of who is affected by this? The large organizations
that we talked about earlier, the top ten charities, the
organizations that receive gifts in kinds, have very low
percentage costs of fundraising.
The small, unpopular organizations have
high percentage costs of fundraising. Then you asked the
question of who uses professional fund raisers? It tends to
be the smaller organizations that don't have the big staff.
Who does your rule outlaw allocations? Those groups that use
professional fund raisers, as has already been suggested by
Bill in his comment.
What we get back to is, your whole draft
and your whole set of rules says that the smaller, least
popular, most vulnerable, the organizations whose speech
needs the most protection are the very groups who are not
permitted to allocate. Therefore, we are not permitted to
qualify either under state, federal, or private rules. So, I
think you are involved in free speech.
MR. LARKIN: I would argue that you have
kind of made the point, the second point that I made, that
yes, in a sense we are involved, but it is indirect. I
appreciate that the rules we write are then picked up on by
other bodies and used to, in effect, regulate people.
It is those other bodies that one would
need to deal with, not with the accounting. Somebody has to
make these rules. If we are not going to write rules on what
are appropriate cost allocation methods, who is? I think
nobody in this room would prefer to have, for example, the
United States Government or state governments write those
rules.
There was a proposal in the 1970's to
have the Post Office department actually create accounting
standards on the theory that people use the mail to mail
appeals and therefore they should have regulatory authority.
The American Institute of CPAs managed to squelch that in a
hurry. That sector was a little bit frightening.
I would disagree that we, ourselves, end
up barring anybody from doing anything they want. I
appreciate that information that we are involved with is
used by other people in that role. You and I will probably
always be somewhat apart in our view of where we really
stand on that. I could go on, but I guess we don't really
have time to.
MR. OLSON: Last year, one of the best
sessions we had was the closing session. We are going to
move right into that, but please join me in thanking our
panel.
(Applause)
|