Documente Academic
Documente Profesional
Documente Cultură
A:lADLER
GREGORY L. COLVIN
ROSEMARY E. FEI
ROBERT A. WEXLER
6&~I&COLVIN
ERIK DRYBURGH
INGRID MITTERMAIER
DAVID A. LEVITT
STEPHANIE L. PETIT
on
------ -- --
235 MONTGOMERY STREET. RUSS BUILDING, SUITE 1220 • SAN FRANCISCO, CALIFORNIA 94104
TEL: 415.421.7555 • FAX: 415.421.0712 • WWW.ADLERCOLVIN.COM
September 1, 2010
Commissioner
3000 IR
It appears that SBAC intentionally has used its Section 501(c)(4) status to cloak
its donors in anonymity while engaging primarily in campaign intervention activities, in excess
of those permitted by a 501 (c)(4) organization. If so, SBAC's misappropriation of
Section 501 (c)(4) status frustrates the principles oftransparency fundamental to the disclosure
and reporting requirements Congress imposed on political organizations through Section 527.
We believe the Service has an obligation to enforce the federal tax laws
applicable to tax-exempt organizations engaging in political activity and to mitigate confusion
whether real or contrived - among state campaign advocates regarding their federal tax reporting
and disclosure obligations. This letter will explain why the California Democratic Party believes
that SBAC has exceeded the boundaries of its current tax status and provide an analysis of the
appropriate federal tax consequences of its activities.
{00276455 DOC; 5}
A-. ADLER
'&'l, &COLVIN
A I..aw Corpor tlon
Hon. Douglas Schulman
Internal Revenue Service
September 1, 2010
Page 2
No more recent Forms 990 are publicly available at this time. SBAC has never filed Schedule C
ofthe Form 990, a Form 1120-POL, or a Form 8871 with the Service, indicating that SBAC
claims all reported expenses relate to social welfare activities. SBAC does not file campaign
finance reports with the California Secretary of State or the United States Federal Elections
Commission?
On August 16, the Sacramento Bee reported that SBAC had launched a new
television advertisement attacking California gubernatorial candidate Jerry Brown ("SBAC Anti
Brown Ad,,).3 The full voiceover script from the SBAC Anti-Brown Ad is as follows:
2 However, SBAC is related to two organizations engaged in political and lobbying activities: The first is the Small
Business Action Committee PAC, a general purpose committee for California campaign finance purposes, with no
federal tax filings; it appears to focus on ballot measures and other legislative lobbying. The second organization is
the Small Business Action Committee Newsletter, formed in November 2009, which is a "slate mailer organization"
for Califomia campaign finance purposes and a Section 527 political organization for federal tax purposes. The
SBAC Newsletter files Forms 8872 on a regular basis. On its Form 8871, filed in November 2009, the SBAC
Newsletter organization indicated that it is connected to SBAC.
3See Torey Van Oot, Group Backing Whitman Launches 'Issue' Ad Attacking Brown, THE SACRAMENTO BEE,
available at http://blogs.sacbee.comJcapitolalertlatest/20 10108/csba.html (last visited August 30, 20 10).
{00276455.DOC; 5)
A.... ADLER
"&'L & COLVIN
Hon. Douglas Schulman
Internal Revenue Service
September 1, 2010
Page 3
Two million Californians out ofwork, and Attorney General Jerry Brown makes it
harder to create jobs, saying he has 1,100 attorneys ready to sue over government
regulations. As a forty-year politician, he doesn't "get" what it takes to create
jobs. As governor, he grew spending, turned a surplus into a deficit, and left office
with 11 % unemployment. And Brown's solution to California's deficit? More
debt, which will kill jobs. Tell Jerry Brown we need more jobs. 4
The Bee article stated that political blog CalBuzz 5 had reported on August 15 that
the cost of running the SBAC Anti-Brown Ad was approximately $1.6 million, although other
knowledgeable sources have subsequently reported to our client that the purchaselprice of the air
time alone (which is likely to continue to increase from the date of this letter) has already
exceeded $3.1 million, a figure that does not include any of the costs of creating 2dr producing the
advertisement, which are likely to be substantial. When asked to comment on the nature of the
SBAC Anti-Brown Ad for California campaign finance law purposes, both SBA I 's President,
Joel Fox, and a spokesperson for SBAC, Jennifer Dudikoff, characterized the advhtisement as
"issue advocacy" and stated that SBAC had complied with all reporting requirembnts for issue
advocacy, which do not include reporting its donors. 6
In its August 15 piece, CalBuzz suggested that the SBAC Anti-Brqwn Ad was
masquerading as issue advocacy so that SBAC could attack Attorney General Brown's
gubernatorial candidacy while hiding the identity of its donors. In apparent confitmation of this
view, KQED, the San Francisco Bay Area's National Public Radio affiliate, reported on the
controversy on August 30,7 quoting Joel Fox, President of SBAC, who stated that SBAC's
donors prefer not to disclose their identities. 8
5See "Small Biz Group Attacks Brown in Phony 'Issues' Ad," available at http://www.calbuzz.com/20IOI08/small
biz-group-attacks-brown-in-phony-issues-adl (last visited August 30, 2010).
6 California campaign finance law differentiates between "issue advocacy" and "express advocacy" by focusing on
the presence or absence of certain "magic words," such as language explicitly asking the viewer to vote for or
against the candidate supported or opposed. Express advocacy requires a higher level of disclosure, including donor
disclosure, than does issue advocacy.
7See John Myers, "Advocate or Educate? The 'Magic Words' of Campaign Ads," available at
http://blogs.kqed.org/capitalnotes/20 I0108/30/advocate-or-educate-the-magic-words-of-campaign-adsl (last visited
August 30, 2010).
8 Fox cited donor concerns about possible retribution by the Attorney General if such donors' opposition to Brown
were made public, but our client and others view that argument as specious. In the same article, the Chair of
California's state campaign finance enforcement agency, the Fair Political Practices Commission ("FPPC"), Dan
Schnur, a former Republican strategist and political communications expert, discounted Mr. Fox's claims that fears
of retribution justif); hiding the identity of political donors; Chair Schnur stated, "I have a much greater concern
{00276455.DOC; 5}
~A ....
ADLER
i&"l. & COLVIN
A Law Corporatfon
Hon. Douglas Schulman
Internal Revenue Service
September 1,2010
Page 4
While there may be debate about whether the SBAC Anti-Brown Ad does in fact
qualify as issue advocacy under California campaign finance disclosure laws,9 its categorization
under California law is not relevant to its characterization under federal tax law. For federal tax
purposes, applying Revenue Ruling 2004-6,10 the SBAC Anti-Brown Ad is "exempt function"
political activity within the meaning of that term under Code Section 527. Since SBAC has
never expended more than $1.62 million on social welfare activities in any prior year, II unless
SBAC engages in unprecedented amounts of social welfare activity in 2010, SBAC no longer
qualifies as a Code Section 501 (c)(4) organization.
Code Section 501 (c)(4) describes "civic leagues or organizations not organized
for profit but operated exclusively for promotion of social welfare ... [provided] no part of the net
earnings of such entity inures to the benefit of any private shareholder or individual."J2 The
Treasury Regulations ("Regulations") promulgated thereunder provide that "a civic league or
organization may be exempt as an organization described in [Code Section] 501 (c)(4) if (i) it is
not organized or operated for profit; and (ii) it is operated exclusively for the promotion of social
welfare."l3 The Regulations clarify that "exclusively" means "primarily": "an organization is
operated exclusively for the promotion of social welfare if it is primarily engaged in promoting
about the individual who gives a hundred dollars or who puts a sign in his store front window than someone who
spends hundreds of thousands or millions of dollars in television commercials." Chair Schnur went on to stress that
the FPPC favors transparency and the right of the public to know the identities of the funders of media promoting or
opposing candidates: "Every voter, every citizen, every union, every corporation has a right to communicate and to
pay good money to communicate its message on television and radio advertising. But what we believe just as
strongly is the voters need to know who's paying for that ad." In fact, Chair Schnur has indicated that the FPPC
intends to tighten the applicable regulations immediately after the November election, which would, if adopted,
effectively bring within the definition of express advocacy communications like the SBAC Anti-Brown Ad,
reducing the size of the current state regulatory loophole and increasing transparency.
9 FPPC Chair Schnur's remarks indicate that he agrees that though the SBAC Anti-Brown Ad did not meet the
definition of "express advocacy" under current California law, the purpose of the advertisement was plainly to
oppose Brown's candidacy as governor and influence the California gubernatorial election.
II That is, in any prior year for which SBAC's Forms 990 are currently publicly available.
121.R.C. §501(c)(4).
{00276455.DOC; 5}
'.6\. ..... ADLER
"&\, & COLVIN
A law Corporation
Hon. Douglas Schulman
Internal Revenue Service
September 1, 2010
Page 5
in some way the common good and general welfare of the people of the community.,,14
Furthermore, the Regulations explicitly state that "the promotion of social welfare does not
include direct or indirect participation or intervention in political campaigns on behalf of or in
opposition to any candidate for public office.,,15 As articulated in Revenue Ruling 81-95,16 a
Section 50 1(c)(4) organization's political activity must be "less than primary" or the organization
will be disqualified from tax-exempt status under Code Section 501 (c)(4). In other words, in
order to be properly classified as a tax-exempt Section 501 (c)(4) organization, the social welfare
activities of the organization, however measured, must be greater than all of its non-social
welfare activities combined. The political campaign intervention activities of a
Section 501(c)(4) organization cannot in any year exceed its social welfare activities.
17 For a more detailed discussion of the factors, please see Revenue Ruling 2004-6.
{00276455.DOC; 5}
TIADLER
'&t:1 &COLVIN
~
Revenue Ruling 2004-6 Analysis
Factors indicating political activity
Communication identifies a candidate for public office? SBAC ad features name and photo ofMr. Brown, Democratic
YES
candidate for governor of California
Communication timing coincides with an electoral campaign? SBAC ad will run within 9 weeks of election day, during
YES
period when candidates are actively campaigning
Communication targets voters in a particular election? SBAC ad will run in California, targeting California voters for
YES
governor in the November 2010 election
Communication identifies candidate's position on the public policy issue that is SBAC ad describes Mr. Brown's alleged position on
the subject of the communication? YES government regulation, the California budget deficit, and job
creation
Candidate's position on the public policy issue has been raised as distinguishing Jobs and the status of the California economy are already
YES
the candidate from others in the campaign? pivotal issues in the campaign. See below for press coverage.
Communication is not part of an ongoing series of substantially similar advocacy We are not aware of similar communications by SBAC on the
YES
communications by the organization on the same issue? jobs issue, certainly not on the scale of the SBAC ad
The most recent report from the Treasury Inspector General for Tax
Administration ("TIGTA Report"i O expressly urges management in the Service's Exempt
18 Because we do not have access to SBAC's financial records for the current tax year, it is conceivable that SBAC's
2010 Form 990 will reflect expenditures substantially exceeding its historical levels. Nonetheless, it appears that at
minimum, SBAC should report the SBAC Anti-Brown Ad as political activity on Schedule C of its 2010 Form 990
and file a Form I 120-POL for 20 10. In the event that SBAC reports social welfare activities for 2010 that appear to
be its primary activities, we urge the Service to closely examine SBAC's Form 990 and its classification of its
activities. We note that in the Forms 990 and 990-EZ available for public inspection, SBAC reported as "Other
Expenses" the following expenditures. While such activity may have had a lobbying or otherwise social welfare
purpose, it may also have supported Section 527 political activity.
Description % of TotaJ
Year Amount
from Form 990-EZ, Part I, Line 16 or Form 990, Part II, Line 43 Expenses
2004 "Tax & Govemment Issues Research"
$ 129,091 8.9%
(differentiated from "Ballot Initiative Support Cost" of$680,394)
2004 "PoJling & Focus Group Research" 127,424 8.8%
2005 "Tax & Govemment Issues Research"
285,180 17.6 %
(differentiated from "Ballot Initiative Support Cost" of $865,000)
2008 "Tax & Government Issues Research" 362,030 41.8 %
2008 "Polling & Focus Group Research" 80,250 9.3 %
19 We also note that if SBAC were reclassified as a taxable corporation, its expenditures for political purposes would
20 Michael R. Phillips, Deputy Inspector General for Audit, "Improvements Have Been Made, but Additional
Actions Could Ensure that Section 527 Political Organizations More Fully Disclose Financial Information"
(Feb. 4, 2010).
{00276455.DOC; 5}
11_ ADLER
.&\.. &COLVIN
A Law corpor3tlon
Hon. Douglas Schulman
Internal Revenue Service
September 1, 20 10
Page 8
To remedy both this specific abuse of federal tax-exempt status, and to discourage
similar abuses by other organizations, we urge the Service to act quickly and decisively in
investigating SBAC.
~(£Ue(;J t~"
Rosemary E. F
REF:NEM:mmg
{00276455DOC; 5}