© 2010 hogan & hartson llp. all rights reserved. mike gilliland, jack keeney, jamie wickett,...

© 2010 Hogan & Hartson LLP. All rights reserved.

Mike Gilliland, Jack Keeney, Jamie Wickett, Adam Feuerstein

March 10, 2010

Citizens United v. Federal Election Commission

The Impact of the Supreme Court’s Decision

2© 2010 Hogan & Hartson LLP. All rights reserved.

Citizens United v. FEC

• “The text and purpose of the First Amendment point in the same direction: Congress may not prohibit political speech, even if the speaker is a corporation or union.” – Chief Justice John Roberts

• “The court's ruling threatens to undermine the integrity of elected institutions around the nation.” – Justice John Paul Stevens

• “The Supreme Court reversed a century of law that I believe will open the floodgates for special interests – including foreign corporations – to spend without limit in our elections. I don't think American elections should be bankrolled by America's most powerful interests, or worse, by foreign entities. They should be decided by the American people. And I'd urge Democrats and Republicans to pass a bill that helps to correct some of these problems.” – President Barack Obama


Citizens United v. FEC

• “I think the Supreme Court’s decision today is a big win for the First Amendment and a step in the right direction." – House Republican Leader John Boehner

• “With today's monumental decision, the Supreme Court took an important step in the direction of restoring the First Amendment rights of these groups by ruling that the Constitution protects their right to express themselves about political candidates and issues up until Election Day.” – Senate Republican Leader Mitch McConnell

• “The Supreme Court in essence has ruled that corporations can buy elections. If that happens, democracy in America is over. We cannot put the law up for sale and award government to the highest bidder.” – Congressman Alan Grayson (D-FL)


Before Citizens United

• 2 USC 441b (as amended by 2002 BCRA) prohibited corporations and unions from making contributions or expenditures in connection with any election to any federal political office.

• This ban included not only direct contributions to candidates but also independent expenditures. An independent expenditure is an expenditure for a communication that expressly advocates the election or defeat of a clearly identified federal candidate that is not made in cooperation with the candidate or the candidate’s authorized committee.

• With limited exceptions, only individuals and political action committees were allowed to make independent expenditures. All persons and entities prohibited from making contributions or expenditures in connection with federal elections, such as corporations and labor organizations, were prohibited from buying ads that expressly supported or opposed named candidates for federal office.


Before Citizens United (cont’d)

• Corporations and labor organizations were also prohibited from making or financing electioneering communications.

• An electioneering communication is any broadcast, cable or satellite communication that fulfills the following conditions:

1. The communication refers to a clearly identified candidate for federal office;

2. The communication is publicly distributed shortly before an election for the office that candidate is seeking; and

3. The communication is targeted to U.S. House and Senate candidates only.

• Electioneering communication rules apply only to communications that are transmitted within sixty (60) days prior to a general election or thirty (30) days prior to a primary election for the federal office sought by the candidate.

• Under prior law, corporations and unions could contribute to electioneering communications only through their political action committees.


Decision in Citizens United v. FEC• In Citizens United v. FEC the Supreme Court struck down as

unconstitutional under the First Amendment federal statutory prohibitions on “independent expenditures” by corporations and labor organizations.

• Essentially, the Court’s ruling permits corporations and labor organizations to use their treasury funds to make independent expenditures in connection with federal elections and to fund electioneering communications.

• The Supreme Court’s ruling did not affect the ban on corporate or union contributions to candidates or the reporting requirements for independent expenditures on electioneering communications.

• The 5/4 decision overruled two precedents about the First Amendment rights of corporations:

– A 1990 decision in Austin v. Michigan Chamber of Commerce that upheld restrictions on corporate spending to support or oppose political candidates;

– A 2003 decision in McConnell v. The Federal Election Commission that upheld the part of the Bipartisan Campaign Reform Act of 2002 that restricted campaign spending by corporations and unions.


Decision in Citizens United v. FEC

• However, the Supreme Court’s decision did continue the Supreme Court’s 1976 distinction, in its decision in Buckley v. Valeo, between constitutionally impermissible regulation of election “expenditures” and constitutionally permissible regulations of “contributions.”

• The Court in Citizens United also upheld the validity of federal law disclosure and disclaimer requirements applicable to election-related advertising by corporations and unions. These disclosure requirements will now apply to advertising by corporations and unions that is permitted as a result of this opinion.

• Currently, organizations spending more than $250 with respect to a given election in a calendar year on election-related ads must report those expenditures to the FEC on FEC Form 5.


What Changed

• This decision allows corporations (and labor unions) to fund, directly, independent media communications (including, but not limited to radio, television, internet, and mail) expressly advocating the election or defeat of federal candidates.

– Example – “Vote for Obama” or “Defeat Obama”

• Broad Impact – The same First Amendment analysis applies equally to state and municipal statutes that similarly prohibit corporate expenditures advocating the election or defeat of state candidates, including judicial candidates in those states that elect judges.

• All corporate independent expenditures must be truthfully disclosed to the FEC, subject to civil or criminal penalties.


What Didn’t Change

• Direct corporate or union contributions to federal candidates or federal party committees remain prohibited.

– While the First Amendment distinction between permissible “expenditures” and prohibited “contributions” is somewhat artificial, the Court has long recognized such a distinction since its seminal 1976 decision in Buckley v. Valeo.

• Public Communications by corporations that are coordinated with candidates and parties remain prohibited.

• Foreign nationals are still prohibited from involvement in U.S. elections.

– 2 U.S.C 441e and 11 C.F.R. 110.20 prohibit “contributions, donations, expenditures, independent expenditures, and disbursements by foreign nationals” directly or indirectly.

– FEC regulations have long recognized that U.S. domestic subsidiaries of foreign corporations may participate in U.S. election-related activities, where only U.S. citizens or foreign nationals with U.S. permanent resident status may be involved in such activities.

• The “soft money” limitations of the McCain-Feingold Act on national parties and others were not changed by the decision.


Impact on Corporate PACs

• Although the statutory requirements and FEC rules were not changed by the holding, there is a practical impact.

• Because corporations can spend money directly on electioneering communications, one permissible use of the PAC (electioneering) can now be accomplished outside the PAC and outside the restrictions on PAC fundraising and expenditures.

• A PAC does remain useful as a vehicle for direct contributions to federal candidates and other committees.


Practical Implications

• A corporation (and labor union) for the first time can communicate with the public, directly through any media, at any time, in support of any federal candidate.

• Direct corporate (and labor union) contributions to federal candidates and federal committees remain prohibited. Such contributions can be made by individuals or a PAC.

• Many corporations and labor unions may revisit the use of a corporate PAC.

• Some existing state prohibitions that are narrowly tailored to prohibit the time and manner of electioneering expenditures by registered lobbyists may have stronger compelling state interests that survive the First Amendment challenge.


What’s Next in Congress – Schumer/Van Hollen Bill

• For government contractors and TARP recipients, prohibits independent corporate expenditures found constitutionally permissible for corporations in general by Citizens United

– Is the stronger legislative justification for these two categories sufficient to withstand First Amendment challenge?

• Bans (again) “foreign” independent corporate expenditures that the Citizens United opinion said was not at issue in case

– Broadens new definition of "foreign" to include:

• Ownership (including shareholders) of 20% or more;

• a majority of board of directors are foreign nationals; or

• for U.S. operations, including U.S subsidiaries, the decision on political activities is controlled by a foreign entity.

– Overbroad in today's global economy?

• Stronger Disclaimers

– “Stand by your ads“ cameo by CEO, or if a group, top funder

– Also, for a group, list top 5 contributors at end of ad


What’s Next in Congress – Schumer/Van Hollen Bill (cont’d)

• Stronger anti-coordination rules

– For House and Senate races, would ban coordination between a corporation or union and the candidate on ads referencing a Congressional candidate within 90 days of the primary through the general election.

– For all federal elections, at any time before the 90 or 120 day window opens, it would ban coordination of ads between a corporation or union and the candidate when they promote, support, attack or oppose a candidate.

• Additional Provisions

– Greater detailed reporting to FEC, shareholders, and by lobbyists

– Lowest unit rate rule for response by candidate or party


What’s Next in the Courts• D.C. Circuit – Speechnow.org v. FEC

– argued after Citizens United and awaiting decision

– individuals seek to pool their resources to make independent expenditures expressly advocating for and against federal candidates

– a nonprofit Section 527 entity

– challenges contribution limits, reporting requirements, and political committee registration requirements

• Three Judge District Court in D.C – Republican National Committee v. FEC

– received supplemental briefing on Citizens United

– challenges soft money prohibitions on political parties under the First Amendment

• Supreme Court – later this year the Court will decide the constitutionality of California’s campaign contribution disclosure laws

– Justice Thomas's dissent on the otherwise 8-1 upholding of federal disclosure and disclaimers in Citizens United is a preview of at least one Justice's view

15© 2010 Hogan & Hartson LLP. All rights reserved. 15© 2010 Hogan & Hartson LLP. All rights reserved.

Citizens United and the Tax Rules

• While Citizens United makes broad statements regarding limitations on campaign activity, it does not directly address the provisions in the Internal Revenue Code.

• Therefore, taxpayers and tax-exempt entities should assume that the rules are not changed and operate accordingly.


501(c)(3) Organizations

• Absolute prohibition on campaign activity

• Generally includes participation or intervention in a campaign in support of, or opposition to, any candidate.

• Excise tax may be imposed on the organization and its managers to the extent that it engages in campaign activity.


501(c)(4) and 501(c)(6)

• 501(c)(4) organizations are social welfare organizations or civic leagues and are often organizations that want to achieve societal betterment but will engage in too much lobbying or political activity to qualify as a 501(c)(3).

• 501(c)(6) organizations include business leagues and trade associations.

• Cannot have campaign activity as their “primary” purpose.

• Must either (i) provide information to their members regarding the portion of their dues allocable to campaign expenditures or (ii) pay a tax on the campaign expenditures.

• Subject to tax on the lesser of their campaign expenditures and their net investment income.


527 Organizations

• Political organizations

• Fund or organization that has a primary purpose of influencing elections.

• For tax purposes, this Section 527 covers both (i) entities commonly referred to as 527 organizations and (ii) PACs.

• Tax exempt with respect to contributions, dues, proceeds from fundraising events, and certain sales of campaign materials and bingo games if amounts are segregated for campaign activity.

• Required to report the organization’s contributions and expenditures and to file information returns.


Business Operations

• No deduction is available as a business expense for campaign expenditures.

– Indirect campaign contributions (dinners, advertising in a program, and inaugural events) and the cancellation of indebtedness to a political party or campaign committee are also limited.

– Expenses incurred to establish a PAC are generally not deductible.

• In addition, a contributor to a tax-exempt organization, such as a trade association, cannot take a deduction to the extent that the contributor is notified that their dues were used for campaign or lobbying activities.

– If the tax-exempt organization does not notify its contributors, it is subject to tax as described earlier.


Citizens United - Tax Law Impact

• As stated earlier, Citizens United does not directly affect any provision we have discussed above and the decision, concurrences, and dissent all do not mention the various tax limitations.

• The Court’s clear disdain for limits on speech does cause one to think it is possible that some of the limitations described above may be subject to constitutional attack.


Constitutional Precedent

• There are two Supreme Court cases that have upheld limitations in the tax Code that relate to campaign activity or lobbying.

– Regan v. Taxation with Representation of Washington – Limits on lobbying for 501(c)(3) organizations do not violate their First Amendment rights.

– Cammarano v. U.S. – Denying a tax deduction for lobbying activities does not violate the first amendment.

• These rationales are tax specific and inapplicable to the facts in Citizens United.


John C. Keeney, Jr.PartnerLitigation/Election Law

Washington, DC

(202) 637-5750

[email protected]

C. Michael GillilandPartnerLegislation/Election Law

Washington, DC

(202) 637-5619

[email protected]

James M. Wickett PartnerLegislation/ Election Law

Washington, DC

(202) 637-6422

[email protected]

Adam S. FeuersteinPartnerTax

Washington, DC

(202) 637-5763

[email protected]

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© 2010 hogan & hartson llp. all rights reserved. mike gilliland, jack keeney, jamie wickett,...

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citizens united

supreme courts decision

hogan hartson llp

american elections

justice john paul stevens

foreign corporations

chief justice john roberts

special interests