Policy Report III: Federal Regulations

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


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?



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.



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.



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.



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.