What the Citizens United Case May Mean for Nonprofits

I just finished listening to today's Supreme Court oral re-argument in Citizens United v. FEC.  For those readers not already familiar with the case, Citizens United is a tax-exempt nonprofit corporation that sought to distribute a 90-minute movie about Hillary Clinton through a video-on-demand cable arrangement during the 2008 primaries.  The FEC objected on the grounds that Hillary: The Movie cannot be reasonably interpreted as anything other than an attempt to convince viewers not to vote for Hillary Clinton and as such federal election law prohibits corporations, including nonprofit corporations, from paying for its broadcast shortly before a relevant election.  Citizens United sued, and the Court then threw the government a curve ball when it decided to order re-argument in the case on the question of whether the entire prohibition on corporations funding independent election communications should be declared unconstitutional (overturning two Supreme Court precedents).  For more details, see the ScotusWiki entry for the case.  A ruling is expected before the 2010 primary season.

If oral argument questions are any indication, it looks like a majority of the Court is in fact ready to throw out the prohibition on corporate spending for independent election communications.  What might this mean for nonprofits?  Well, history indicates that business corporations are hesitant to spend directly on political ads, presumably for fear of alienating customers, shareholders, and employees.  Instead, they channel such spending through groups like Citizens United, Chambers of Commerce, and trade associations - almost all of which are tax-exempt, nonprofit corporations.  If the Court's decision leads to a significant increasing in such spending - as supporters of the prohibition strongly believe - it will put pressure on the two weak spots when it comes to these tax-exempt but not charitable entities.  First, they can only maintain 501(c)(4) or 501(c)(6) tax-exempt status if political activity is not their "primary" activity - whatever that means.  Second, it is not completely clear what is political activity given the IRS' facts and circumstances approach to that topic.  It is on this latter pressure point that highly successful campaign finance law challenger Jim Bopp (who originally represented Citizens United) is focusing in the Catholic Answers and Christian Coalition of Florida cases (complaints available at the James Madison Center for Free Speech website).  While the value of 501(c)(4) or 501(c)(6) status is limited if such entities still have to disclose the identity of their donors because they engage in activity covered by federal election law (the disclosure provisions could well survive even if the corporate funding prohibition goes down), such status will probably still be sought so as to avoid classification by the IRS as a 527 organization that has proven to often be a short path to classification by the FEC as a PAC (with strict limits on contribution sources and amounts).

So the bottom line is a decision in Citizens United's favor may lead to many more challenges to the political activity rules for tax-exempt organizations.  We may be in for quite a ride.

LHM