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Primer on Corporate Political Spending
Corporate Political
Spending:
What It Includes, How It Is
Defined[1]
Overview
The Bipartisan
Campaign Reform Act (BCRA) of 2002 was enacted,
in part, to staunch the flow of corporate money
into the political process. It prohibited
unlimited (or soft money) contributions
to national political parties
and to committees controlled by
federal officeholders. However, BCRA
did not stop the flow of corporate money—it
only changed the channels through which this
money moves.
Today corporations
remain free to contribute soft money
to non-connected political committees,
popularly referred to as 527s, to state
and local candidates and to political
committees, including party committees, at the
state level. Corporations are also free to use
trade associations and other tax exempt
entities as vehicles for corporate
political involvement.
As corporate
political money routes continue to proliferate,
the need for greater transparency and
accountability on the part of the corporations
increases. Companies have a responsibility to
shareholders to ensure that corporate funds are
being used in ways that advance the long-term
interests of the company and enhance
shareholder value. Boards of directors have a
fiduciary responsibility to evaluate the risks
involved with political spending and ensure
that management’s political expenditures align
with shareholder interests. Finally,
shareholders have a right to know how their
money is being used politically and to hold the
company accountable for its political
activities.
To assure that
transparency covers the full range of political
spending, it is important to understand what
that spending comprises and the various ways in
which corporate money can be used for political
purposes. The purpose of this paper is to
- define corporate political
spending,
- provide an inclusive
picture of the different routes that corporate
money can take, and
- provide a map of corporate
political spending, noting the significant
breaks in transparency.
By working from a
common understanding of what constitutes
political spending, companies can create
disclosure and approval policies that cover the
relevant activities. Shareholders and other
interested parties will know what is being
disclosed.
Political Spending
Defined
Using current
regulatory definitions, including the Internal
Revenue Service’s (IRS) definition of political
intervention, political spending
comprises:
- any direct or indirect
contributions or expenditures on behalf of a
candidate for public office or referendas,
- any payments made to trade
associations or tax-exempt entities used for
intervening in a political campaign,
and
- any direct or indirect
political expenditure that must be reported to
the Federal Election Commission, Internal
Revenue Service or state disclosure agency.
This definition applies, but is not
limited, to the following expenditures:
·
Contributions to or
expenditures on behalf of political
candidates
·
Contributions to or
expenditures on behalf of political
parties
·
Contributions to or
expenditures on behalf of political committees
and other political entities organized and
operating under 26 USC Sec. 527 of the Internal
Revenue Code (i.e. Republican Governors
Association and Democratic Governors
Association)
·
Any portion of any
dues or similar payments made to any tax exempt
organization that is used for an expenditure or
contribution that if made directly by the
corporation would not be deductible under
section 162(e)(1) of the Internal Revenue
Code
·
Payment for
advertisements, printing and other campaign
expenses
·
Donation of company
products or services to a political
organization
·
Reimbursing someone
for a political
contributions
Political Spending and
Disclosure
Requirements
The political expenditures noted above
are not disclosed in any central place.
Companies are not currently required to
disclose their political spending. Therefore,
where—or if—the expenditures are disclosed
depends on the nature of the expenditure and
its recipient.
Following are typical corporate
political expenditures and the relevant
disclosure requirements:
Contributions to
State and Local Candidates, Political Parties
and Political Committees (including those
supporting or opposing ballot initiatives)
State
laws vary
regarding corporate political spending. Roughly
half the states allow corporate political
contributions, with varying limitations on the
allowable amounts. Few states obligate
corporations to report. For the most part,
state and local political contributions are
reported by the recipient committees to the
relevant state agency. These filings are
available generally to the public.
Contributions to
Other Political Entities Organized and
Operating under 26 US Sec. 527 of the Internal
Revenue Code
So-called 527s[3]
These forms are available to the public. Companies are not required to
report their contributions to 527s.
Political Payments
to Trade Associations and Other Tax Exempt
Organizations
Corporations can
make unlimited payments to trade
associations and other tax exempt
organizations. Trade associations are not
required to disclose their members, and
companies are not required to disclose their
trade association memberships.
Under the tax
code, civic leagues and social welfare
organizations (501(c)(4) organizations) and
business leagues and trade associations (501(c)(6)
organizations) may engage in political
campaign intervention, so long as the political
activity does not comprise the group’s primary
activity.[5]
What Constitutes Political
Intervention
According to the
IRS, political campaign intervention
includes any and all activities that favor or
oppose one or more candidates for public
office. For example:
- contributions to political
campaign funds or public statements of position
(verbal or written) made by or on behalf of an
organization in favor of or in opposition to
any candidate for public office are considered
political intervention,
- distributing statements
prepared by others that favor or oppose any
candidate for public office is also considered
political intervention, and
- allowing a candidate to use
an organization’s assets or facilities may also
be considered political intervention.
Certain activities will require an
evaluation of all the facts and circumstances
to determine whether they result in political
campaign intervention.[6]
Reporting to
Companies
Trade
associations are not required to
tell companies the portion of their payments
used specifically for political purposes.
However, for tax purposes, they are required to
tell companies the portion of their payments
used for political and
lobbying activities, unless the associations
choose to pay a tax on this spending
themselves.
Tax
Deductibility
Under the Internal
Revenue Code section 162(e)(1), members of
trade associations cannot deduct the part of
the dues or other payments to the group that is
used for any of the following lobbying or
political activities: influencing legislation;
participating or intervening in a political
campaign for, or against, any candidate for
public office; trying to influence the general
public, or part of the general public, with
respect to elections, legislative matters or
referendums (also known as grassroots
lobbying); communicating directly with certain
executive branch officials to try to influence
their official actions or positions.[7]
As a result, trade associations are
required by law to notify anyone paying dues
the portion of their payments that the group
estimates will be used for lobbying and
political activities, as defined under section
162(e)(1). The associations are not required to
provide a breakdown of these expenditures. As
an alternative to giving the member companies
this information, the trade association may
choose to pay a tax—known as the “proxy
tax”—at the highest rate imposed by the
Internal Revenue Code.[8]
Company Knowledge of Trade Association
Political
Spending
Companies that are members of trade
associations should therefore know the amount
of their dues and other payments used for
political and lobbying activities, unless the
trade association is paying the proxy tax.
Companies are not required to disclose that
information to their shareholders or to the
public.
Trade Association Political Disclosure:
Minimal
Trade associations are required to
disclose on their Form
990s the total dues received from members,
the aggregate amount of lobbying and political
expenditures, and the amount disclosed to
members as the nondeductible portion of dues.
However, the associations are not required to
provide a breakdown of their section 162(e)(1)
lobbying and political expenditures—only the
aggregate amount is available.[9]
Trade associations are also required to
disclose the aggregate amount used by the
association for political expenditures on their
Form 990s.[11]
Trade associations are not required to provide
a breakdown of these
expenditures.
Trade Association Segregated Funds:
Different Reporting
Requirements
Trade associations may establish
separate segregated funds—such as a political
action committee—which have their own reporting
requirements. Trade associations may transfer
dues or other payments to these funds. If those
payments are used for political activities,
that amount is taxable and should be reported
on the trade association’s Form 990 as part of
the group’s political expenditures.[12]
Conclusion: Implications
for Companies and
Shareholders
Corporate
political spending can follow a variety of
routes, some of which enable companies to limit
and even escape disclosure of their political
activity.
Corporate political
contributions are not disclosed in any central
place, leaving shareholders to scour countless
state campaign finance reports and IRS filings.
While campaign finance watchdog groups provide
helpful information on corporate political
giving, no one source provides a comprehensive
picture of corporate political
contributions.
Compounding the
problem, corporations are allowed to
funnel their political activity through trade
associations and other tax exempt
entities. As this paper details, under
current tax laws corporate political spending
can be run through a trade association with
little risk that the corporate donors will ever
be disclosed, and great risk that the corporate
donors are not even aware of how their money is
being used.
These gaps in
transparency and accountability create serious
financial, legal, and reputational risks for
companies that make political contributions or
that belong to politically active trade
associations. In order to protect shareholder
value and promote the company’s best interests,
companies should adopt approval, oversight, and
disclosure policies that cover the full range
of corporate political activity.
[1] The authors of the paper are Center for Political Accountability research director Jamie Carroll, co-director Bruce F. Freed and counsel Karl Sandstrom.
[2] This refers to political organizations which do not comprehensively report their activities to the Federal Election Commission or a state reporting agency.
[3] Internal Revenue Service, Publication 557 (3/2005), Tax-Exempt Status for Your Organization, www.irs.gov/publications/p557/index.html
[4] Internal Revenue Service, Publication 557 (3/2005), Tax-Exempt Status for Your Organization, www.irs.gov/publications/p557/index.html
[5] “Political Campaign and Lobbying Activities of IRC 501(c)(4), (c)(5), and (c)(6) Organizations,” by John Francis Reilly and Barbara A. Braig Allen, Exempt Organizations-Technical Instructions Program for FY 2003, www.irs.gov/pub/irs-tege/eotopicl03.pdf
[6] Certain issue advocacy activity borders on political campaign intervention and requires a more thorough evaluation of the facts and circumstances. For example, even if a statement does not expressly urge votes for or against a specific candidate, according to the IRS, the statement might be considered political intervention if there is any message favoring or opposing a candidate. Even if the candidate is not identified by name, he or she can be identified by other means “such as showing a picture of the candidate, referring to political party affiliations, or other distinctive features of a candidate’s platform or biography.” Certain key factors that help determine whether the ad is political intervention are: whether the statement identifies a candidate; whether the statement is delivered close in time to the election; and whether the issue addressed in the communication has been raised as an issue distinguishing candidates for a given office. (Internal Revenue Service, Fact Sheet 2006-17, February 2006, Election Year Activities and the Prohibition on Political Campaign Intervention for Section 501(c)(3) Organizations, www.irs.gov/newsroom/article/0,,id=154712,00.html )
[7] Internal Revenue Service, Publication 557 (3/2005), Tax-Exempt Status for Your Organization, www.irs.gov/publications/p557/index.html This rule includes an exception for local legislation expenses, such as: appearing before, submitting statements to, or sending communications to members of a local council with respect to proposed legislation of direct interest to the member.
[8] Internal Revenue Service, Proxy Tax, www.irs.gov/charities/article/0,,id=112907,00.html and “Political Campaign and Lobbying Activities of IRC 501(c)(4), (c)(5), and (c)(6) Organizations,” by John Francis Reilly and Barbara A. Braig Allen, Exempt Organizations-Technical Instructions Program for FY 2003, www.irs.gov/pub/irs-tege/eotopicl03.pdf
[9] “Political Campaign and Lobbying Activities of IRC 501(c)(4), (c)(5), and (c)(6) Organizations,” by John Francis Reilly and Barbara A. Braig Allen, Exempt Organizations-Technical Instructions Program for FY 2003, www.irs.gov/pub/irs-tege/eotopicl03.pdf
[10] It is noted that many nonprofits that
spend a significant amount on television ads
and direct mailings and other expenditures
during election campaigns still report $0 for
their political expenditures on their Form
990s. Many speculate that this reflects a
failure on the part of the IRS to enforce the
regulations. Washington Monthly editor Nicholas
Confessore writes: “Given that there are 1.4
million tax-exempt organizations in the
[11] Internal Revenue Service, Instructions for Form 990 and Form 990-EZ, www.irs.gov/instructions/i990-ez/ar02.html#d0e4574
[12] “Political Campaign and Lobbying Activities of IRC 501(c)(4), (c)(5), and (c)(6) Organizations,” by John Francis Reilly and Barbara A. Braig Allen, Exempt Organizations-Technical Instructions Program for FY 2003, www.irs.gov/pub/irs-tege/eotopicl03.pdf