Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

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Legislative Options After Citizens United v.

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R41096

CRS Report for Congress

Prepared for Members and Committees of Congress

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Summary

In Citizens United v. FEC, the Supreme Court invalidated two provisions of the Federal Election

Campaign Act (FECA), finding that they were unconstitutional under the First Amendment. The

decision struck down the long-standing prohibition on corporations using their general treasury

funds to make independent expenditures, and Section 203 of the Bipartisan Campaign Reform

Act of 2002 (BCRA), prohibiting corporations from using their general treasury funds for

“electioneering communications.” BCRA defines “electioneering communication” as any

broadcast, cable, or satellite communication that refers to a clearly identified federal candidate

made within 60 days of a general election or 30 days of a primary. The Court determined that

these prohibitions constitute a “ban on speech” in violation of the First Amendment. The Court,

however, upheld the disclaimer and disclosure requirements in Sections 201 and 311 of BCRA as

applied to a movie regarding a presidential candidate that was produced by Citizens United, a taxexempt corporation, and the broadcast advertisements it planned to run promoting the movie.

As a result of the Court’s ruling, federal campaign finance law no longer restricts corporate or,

most likely, labor union use of general treasury funds to make independent expenditures for any

communication expressly advocating election or defeat of a candidate. In addition, the law now

also permits corporate and union treasury funding of electioneering communications. However,

the law prohibiting contributions to candidates, political parties, and political action committees

(PACs) from corporate and labor union general treasuries still applies.

In response to the Supreme Court’s ruling, various proposals have been discussed and legislation

has been introduced in the 111th Congress, including for example H.Con.Res. 13, H.J.Res. 13,

H.J.Res. 68, H.J.Res. 74, H.R. 158, H.R. 1095, H.R. 1826, H.R. 2038, H.R. 2056, H.R. 3574,

H.R. 3859, H.R. 4431, H.R. 4432, H.R. 4433, H.R. 4434, H.R. 4435, H.R. 4487, H.R. 4510, H.R.

4511, H.R. 4517, H.R. 4522, H.R. 4523, H.R. 4527, H.R. 4537, H.R. 4540, H.R. 4550, H.R.

4583, H.R. 4617, H.R. 4630, H.R. 4644, H.R. 5175, S.J.Res. 28, S. 133, S. 752, S. 2954, S. 2959,

S. 3004, and S. 3628. This report provides an analysis of the constitutional and legal issues raised

by several proposals, organized by regulatory topic: increasing disclaimer requirements,

increasing disclosure for tax-exempt organizations, requiring shareholder notification and

approval, restricting U.S. subsidiaries of foreign corporations, restricting political expenditures by

government contractors and grantees, taxing corporate independent expenditures, and providing

public financing for congressional campaigns. The report also addresses amending the

Constitution.

For a comprehensive discussion of legislation that has been introduced and an analysis of policy

options, see CRS Report R41054, Campaign Finance Policy After Citizens United v. Federal

Election Commission: Issues and Options for Congress, by (name redacted). For a legal analysis of

the Supreme Court’s ruling, see CRS Report R41045, The Constitutionality of Regulating

Corporate Expenditures: A Brief Analysis of the Supreme Court Ruling in Citizens United v. FEC,

by (name redacted).

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Contents

Background ................................................................................................................................1

Impact of Citizens United on Current Federal Campaign Finance Law...................................2

Legislation and Proposals in Response to Citizens United......................................................2

Increased Disclaimer Requirements.............................................................................................3

Disclosure of Donors to § 501(c) Organizations ..........................................................................4

Shareholder Notification and Approval........................................................................................7

Restrictions on Foreign-Owned Corporations ..............................................................................8

Foreign Corporations vs. Foreign-Owned Corporations under Election Law ..........................9

Redefining “Foreign Nationals” to Include Foreign-Owned Corporations ..............................9

First Amendment Rights...................................................................................................... 12

Vagueness ........................................................................................................................... 13

Conditioning Government Contracts or Grants on Forgoing Right to Political Speech ............... 14

“Unconstitutional Conditions” on the Receipt of Federal Funds........................................... 14

Government Program Restrictions and “Government Speech”............................................. 17

Governmental Interest Promoted by the Legislation; Least Restrictive Means of

Accomplishing Objective ................................................................................................. 18

Other Government Interests or Narrower Tailoring Sufficient to Justify Restrictions

Involving Government Contractors .................................................................................. 20

Taxation of Corporate Campaign-Related Expenditures............................................................. 22

Public Financing For Congressional Campaigns ........................................................................ 26

Constitutional Amendment ........................................................................................................ 27

Contacts

Author Contact Information ...................................................................................................... 28

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Background

In a 5-to-4 ruling, the Supreme Court in Citizens United v. Federal Election Commission (FEC)1

lifted certain restrictions on corporate independent expenditures. The decision invalidated two

provisions of the Federal Election Campaign Act (FECA), codified at 2 U.S.C. § 441b. It struck

down the long-standing prohibition on corporations using their general treasury funds to make

independent expenditures,2 and Section 203 of the Bipartisan Campaign Reform Act of 2002

(BCRA), which amended FECA, prohibiting corporations from using their general treasury funds

for “electioneering communications.”3 The Court determined that these prohibitions constitute a

“ban on speech” in violation of the First Amendment.4 In so doing, the Court overruled its earlier

holdings in Austin v. Michigan Chamber of Commerce,5 finding that the allegedly distorting effect

of corporate expenditures provided no basis for allowing the government to limit corporate

independent expenditures. It also overruled the portion of its decision in McConnell v. FEC,6

upholding the facial validity of Section 203 of BCRA, finding that the McConnell Court relied on

Austin.7

The Court, however, upheld the disclaimer and disclosure requirements in Sections 201 and 311

of BCRA as applied to a movie regarding a presidential candidate that was produced by Citizens

United, a tax-exempt corporation, and the broadcast advertisements it planned to run promoting

the movie.8 According to the Court, while they may burden the ability to speak, disclaimer and

disclosure requirements “impose no ceiling on campaign-related activities.”9

It does not appear that the Court’s ruling in Citizens United affects the validity of Title I of

BCRA,10 which generally bans the raising of soft, unregulated money by national parties and

federal candidates or officials, and restricts soft money spending by state parties for “federal

election activities.” For a legal analysis of the Supreme Court’s ruling, see CRS Report R41045,

The Constitutionality of Regulating Corporate Expenditures: A Brief Analysis of the Supreme

Court Ruling in Citizens United v. FEC, by (name redacted).

No. 08-205, slip op. (U.S. Jan. 21, 2010).

See id. at 20-51.

See id.

Id. at 22.

494 U.S. 652 (1990).

540 U.S. 93 (2003).

See Citizens United, slip op. at 50. For further discussion of McConnell v. FEC and Austin v. Michigan Chamber of

Commerce, see CRS Report RL30669, The Constitutionality of Campaign Finance Regulation: Buckley v. Valeo and

Its Supreme Court Progeny, by (name redacted).

See slip op. at 50-57.

Id. (quoting Buckley v. Valeo, 424 U.S. 1, 64 (1976)).

2 U.S.C. § 441i(a).

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Impact of Citizens United on Current Federal Campaign Finance

Law

In brief, before the Court’s ruling, corporations and labor unions were prohibited from using their

general treasury funds to make expenditures for communications expressly advocating election or

defeat of a clearly identified federal candidate. 11 In addition, corporations and unions were

prohibited from using general treasury funds to finance electioneering communications,12 which

FECA defines as any broadcast, cable, or satellite communication that refers to a clearly

identified federal candidate made within 60 days of a general election or 30 days of a primary.13

However, corporations and labor unions were permitted to use political action committees

(PACs), financed with regulated contributions from certain employees, shareholders, or members,

to make independent expenditures for express advocacy communications and to fund

electioneering communications within the restricted time periods.14

As a result of the Court’s ruling, it appears that federal campaign finance law does not restrict

corporate or, most likely, labor union15 use of general treasury funds to make independent

expenditures for any communication expressly advocating election or defeat of a candidate. In

addition, the law now also permits corporate and union treasury funding of electioneering

communications.16 However, the law prohibiting contributions to candidates, political parties, and

political action committees (PACs) from corporate and labor union general treasuries still

applies.17

Legislation and Proposals in Response to Citizens United

In response to the Supreme Court’s ruling in Citizens United v. FEC, various proposals have been

discussed and legislation has been introduced. This report provides an analysis of the

constitutional and legal issues raised by several proposals, organized by regulatory topic:

increasing disclaimer requirements, increasing disclosure for tax-exempt organizations, requiring

shareholder notification and approval, restricting U.S. subsidiaries of foreign corporations,

restricting political expenditures by government contractors and grantees, taxing corporate

independent expenditures, and providing public financing for congressional campaigns. The

report also discusses amending the Constitution.

This report does not describe specific legislation. For a comprehensive discussion of legislation

that has been introduced and an analysis of policy options, see CRS Report R41054, Campaign

2 U.S.C. § 441b(a).

2 U.S.C. § 441b(b).

2 U.S.C. § 434(f)(3).

2 U.S.C. § 441b(b)(2)(C).

Although the issue before the Court was limited to the application of 2 U.S.C. § 441b to Citizens United, a

corporation, the reasoning of the opinion would also appear likely to apply to labor unions. “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.” Citizens United, slip op. at 5 (Roberts, C.J., concurring).

In addition to impacting federal campaign finance law, it appears that the Court’s ruling in Citizens United v. FEC

may also affect numerous state laws prohibiting corporate expenditures. See, e.g., Ian Urbina, Consequences for State

Laws in Court Ruling, N.Y. TIMES, Jan. 23, 2010.

2 U.S.C. § 441b(a).

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Finance Policy After Citizens United v. Federal Election Commission: Issues and Options for

Congress, by (name redacted).18

Increased Disclaimer Requirements19

Some legislation and proposals that have been discussed in response to the Supreme Court’s

ruling in Citizens United v. FEC would increase disclaimer requirements for political

communications paid for by corporations. The term “disclaimer” typically refers to sponsor

identification that is included in the content of the advertisement. For example, such proposals

may require advertisements to include a statement by the president or chief executive officer of

the corporation, identifying such individual by name and position, and indicating that the

corporation that he or she heads paid for the ad and approved its contents. In addition, such

proposals may require inclusion of an image of the individual making the statement.

Currently, the Federal Election Campaign Act (FECA) requires that any public political

advertising financed by a political committee include various disclaimers. Of particular relevance,

it also requires that corporations and labor unions include disclaimers in any communication

expressly advocating the election or defeat of a clearly identified candidate, any solicitation of

contributions, or any other public political advertising, including electioneering communications,

that are financed by corporations and labor unions.20 FECA defines “electioneering

communication” as any broadcast, cable, or satellite communication that refers to a clearly

identified federal candidate made within 60 days of a general election or 30 days of a primary.21

For communications financed by corporations and labor unions, FECA requires the disclaimer to

clearly state the name and permanent street address, telephone number, or website address of the

person who paid for the communication and state that the communication was not authorized by

any candidate or candidate committee. In radio and television advertisements, corporations and

labor unions are required to include in a clearly spoken manner, the following audio statement:

“________ is responsible for the content of this advertising,” with the blank to be filled in with

the name of the entity paying for the ad. In addition, in television advertisements, the statement is

required to be conveyed by an unobscured, full-screen view of a representative of the entity

paying for the ad, in a voice-over, and shall also appear in a clearly readable manner with a

reasonable degree of color contrast for a period of at least four seconds. 22 This requirement is

often referred to as “stand by your ad.” FECA does not require disclosure for advertising that

does not expressly advocate election or defeat of a clearly identified candidate, and that does not

meet the criteria of an “electioneering communication.”

In McConnell v. FEC,23 by a vote of 8 to 1, the Supreme Court upheld the facial validity of the

disclaimer requirement in Section 311 of BCRA. Specifically, the Court found that it “bears a

For a discussion of campaign finance policy issues in the 1111th Congress, see CRS Report R40091, Campaign

Finance: Potential Legislative and Policy Issues for the 111th Congress, by (name redacted).

This portion of the report discussing increased disclaimer requirements was written by (name redacted).

2 U.S.C. § 441d(a). See 2 U.S.C. § 431(11), which defines “person” to include corporations and labor unions.

2 U.S.C. § 434(f)(3).

2 U.S.C. § 441d(d)(2).

540 U.S. 93 (2003).

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

sufficient relationship to the important governmental interest of ‘shedding the light of publicity’

on campaign financing.”24

Similarly, in Citizens United v. FEC, by a vote of 8 to 1, the Court upheld the disclaimer

requirement in Section 311 as applied to a movie that Citizens United produced regarding a

presidential candidate and the broadcast advertisements it planned to run promoting the movie.25

According to the Court, while they may burden the ability to speak, disclaimer and disclosure

requirements “impose no ceiling on campaign-related activities,”26 and “do not prevent anyone

from speaking.”27 According to the Court, the disclaimer requirements in Section 311 of BCRA

“provid[e] the electorate with information,”28 and “insure that the voters are fully informed”

about who is speaking.29 Moreover, they facilitate the ability of a listener or viewer to “evaluate

the arguments to which they are being subjected.”30 At a minimum, the Court announced,

disclaimers make clear that an advertisement is not financed by a candidate or a political party.

As a result, it appears likely that enactment of increased disclaimer requirements for corporatefinanced political advertisements would survive facial challenges to their constitutionality.31

However, if a disclaimer requirement was so burdensome that it impeded the ability of a

corporation to speak—for example, a requirement that a disclaimer comprise an unreasonable

amount of time—a court might conclude that it is a violation of a corporation’s free speech rights

under Citizens United.

Disclosure of Donors to § 501(c) Organizations32

Some have proposed requiring the identities of certain donors to § 501(c) organizations be

publicly disclosed, either through traditional disclosure mechanisms or the disclaimer provisions

discussed above. The organizations described in IRC § 501(c) have federal tax-exempt status.

They include § 501(c)(4) social welfare organizations, § 501(c)(5) labor unions, and § 501(c)(6)

trade associations.33

Id. at 231 (quoting Buckley, 424 U.S. at 81).

Citizens United, slip. op. at 50-57.

Id. at 51 (quoting Buckley, 424 U.S. at 64).

Id. (quoting McConnell v. FEC, 540 U.S. at 201).

Id. (quoting McConnell at 196).

Id. at 52-53 (quoting Buckley, 424 U.S. at 76).

Id. at 53 (quoting First Nat’l Bank of Boston v. Bellotti, 435 U.S. 765, 792 n. 32 (1978)).

Note, as discussed below, if a disclaimer proposal required that donors to a corporation – such as a tax-exempt

corporation – be disclosed in a public communication, the Supreme Court’s analysis of the constitutionality of

disclosure requirements would apply. According to the Court, such requirements would be unconstitutional as applied

to an organization if there were a reasonable probability that its donors would be subject to threats, harassment, or

reprisals. See id. at 54-55; National Association for the Advancement of Colored People v. Alabama, 357 U.S. 449,

462-63 (1958).

This portion of the report discussing increased disclosure for tax-exempt organizations was written by (name red

acted).

For more information on § 501(c) organizations, see CRS Report RL33377, Tax-Exempt Organizations: Political

Activity Restrictions and Disclosure Requirements, by (name redacted). For purposes of this report, it is assumed that §

501(c)(3) organizations would not be subject to the proposed donor disclosure requirements since such organizations

are not permitted to engage in campaign intervention under federal tax law. See IRC § 501(c)(3).

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Under current law, FECA requires the public disclosure of certain donors to entities, including §

501(c) organizations, that make independent expenditures and electioneering communications. In

general, the identification of donors to such entities is subject to disclosure if their donations

exceed a threshold amount and are made to further the entity’s campaign activity. 34 In certain

situations, the identity of any donor whose contribution exceeds the threshold amount may be

subject to disclosure, regardless of whether it was made to further the activity.35 The organization

may avoid disclosing these donors by establishing a separate account to pay for the activities,

which will result in only the donors to that account being publicly disclosed.36

Some might argue that compelled donor disclosure chills the organization’s and donors’ First

Amendment rights.37 In Citizens United, the Court upheld disclosure requirements as applied to

the movie that Citizens United produced and the broadcast advertisements it planned to run

promoting the movie. 38 The Court explained that while they may burden the ability to speak, the

requirements “impose no ceiling on campaign-related activities,” and “do not prevent anyone

from speaking.”39 At the same time, such requirements would be unconstitutional as applied to an

organization if there is a reasonable probability that its donors would be subject to threats,

harassment, or reprisals.40

As mentioned, some have suggested mandating the public disclosure of certain donors to § 501(c)

organizations beyond that required by current law. Additionally, some have proposed expanding

FECA’s disclaimer requirements so that large donors to § 501(c) organizations would be named in

the organization’s political advertisements. Some of these proposals would differ from the

existing provisions described above in that they would require public disclosure of certain donors

regardless of the purpose for which the money was donated or used, without providing a

mechanism by which the organization could limit such disclosure to only those donors whose

contributions were intended to be used for political purposes.

Some have raised the possibility that there might be constitutional limitations on the ability of

Congress to require disclosure of donors who have not necessarily donated specifically for

See 2 U.S.C. § 434(c)(2)(C) (requiring any “person” (other than a political committee) that makes an independent

expenditure in an aggregate amount or value of more than $250 during the year to disclose, among other things, the

identification of donors who contributed more than $200 “for the purpose of furthering an independent expenditure”);

see also 11 C.F.R. § 104.20 (requiring corporations, labor unions, and qualified nonprofit corporations that make

certain types of electioneering communications to disclose the donors who contributed more than $1,000 “for the

purpose of furthering” the communication). This regulation was promulgated prior to Citizens United, and some might

question its applicability in light of the Court’s decision.

See 2 U.S.C. § 434(f)(2)(E), (F) (requiring any “person” who makes electioneering communications that aggregate

more than $10,000 during the year to report, among other things, the identity of donors who have contributed at least

$1,000 during the period between the first day of the preceding calendar year and the date of the communication;

however, if the disbursement was paid out from a separate bank account that contains only contributions by U.S.

citizens or green cardholders made directly to the account for electioneering communications, then only the donors who

have contributed at least $1,000 to that account are disclosed).

See id.

U.S. CONST. amend. I (“Congress shall make no law respecting an establishment of religion, or prohibiting the free

exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble,

and to petition the Government for a redress of grievances.”)

See Citizens United, slip op. at 50-57.

Id. at 51(internal quotations omitted).

See id. at 54-55; National Association for the Advancement of Colored People v. Alabama, 357 U.S. 449, 462-63

(1958).

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

political activity, particularly if there is no mechanism by which such disclosure could be limited.

In other words, some might argue that the differences between the proposals and existing law

could be constitutionally significant. How a court would analyze such an argument might be

uncertain. 41 It seems any requirement would be subject to “exacting scrutiny, which requires a

substantial relation between the disclosure requirement and a sufficiently important governmental

interest.”42

Here, some might argue, for example, that the relationship between (1) the compelled disclosure

of donors who gave money for reasons not necessarily related to campaign activity and (2) the

government’s interest to provide information to the electorate or avoid corruption or the

appearance of corruption is insufficient to withstand judicial scrutiny. Proponents of such an

argument might point to the fact that § 501(c) organizations engage in a panoply of activities

outside the election context and campaign activity cannot, by law, be their primary activity. 43

Thus, donors who make non-earmarked contributions are supporting the entirety of the

organization’s activities, and some might question whether the government can require the public

disclosure of their identities simply because the organization happens to engage in limited

amounts of campaign activity. 44 Such an argument might be extended to the disclaimer proposals

as well.

On the other hand, it is unclear whether this argument has constitutional merit. As discussed

above, the Court has generally looked favorably on disclosure and disclaimer requirements, and

there may be other factors that support the constitutionality of the proposals. For example, while

the § 501(c) organizations we are concerned with here are limited in the amount of campaign

activity they may participate in, they are permitted to engage in an unlimited amount of lobbying.

Thus, a court might look at the full spectrum of the organization’s activities when determining

whether a donor disclosure requirement is sufficiently related to the government’s informational

interest. A court might also consider the extent to which the requirement furthers donor protection

interests (i.e., whether donors’ interests are presumably aligned with the organization’s activities

or donors are on notice that their donations might be disclosed). Additionally, particular proposals

might contain limitations or protections that could be important to a court’s analysis.

It does not appear there is a directly analogous provision in federal law. Federal lobbying law requires registered

lobbyists to report the name and other information of non-client organizations that contribute at least $5,000 to the

lobbyist or his/her client in the quarterly period to fund the lobbying activities and “actively participates in the

planning, supervision, or control” of those activities. 2 U.S.C. § 1603(b)(3). The constitutionality of this provision was

upheld by the U.S. Court of Appeals for the D.C. Circuit in National Association of Manufacturers v. Taylor, 582 F.3d

1 (D.C. Cir. 2009). Under the tax laws, § 501(c) organizations that file an annual information return (Form 990) are

generally required to disclose significant donors (typically those who give at least $5000 during the year) to the IRS. 26

C.F.R. § 1.6033-2(a)(2)(ii)(f). No identifying information of these donors is subject to public disclosure under the tax

laws except in the case of private foundations (which are a type of § 501(c)(3) organization). IRC § 6104(b), (d). The

private foundation provision, which does not appear to have been challenged on constitutional grounds, might be

supported as an anti-abuse provision since these entities generally have a small number of donors who often have

significant control of the foundation.

Citizens United, slip op. at 51 (internal quotations omitted).

See Rev. Rul. 81-95, 1981-1 C.B. 332 (ruling that lawful participation in campaign activity would not affect the §

501(c)(4) status of an organization whose primary activity was promoting social welfare); Gen. Couns. Mem. 34233

(Dec. 30, 1969) (applying similar reasoning to § 501(c)(5) and § 501(c)(6) organizations).

Some proposals would not appear to permit the organization to establish a separate account solely to fund the

political activities, and then limit disclosure to only those donors who contribute to that account. Thus, it might be that

even if the donor requested his or her donation not be used for campaign activity, and the organization agreed, the

donor’s identity could be subject to public disclosure.

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Shareholder Notification and Approval45

There is congressional interest in amending federal securities laws to require a corporation to

provide notice to shareholders of corporate political spending and/or to require that shareholders

authorize corporate political spending.46 For example, a very general description of such a bill is a

proposal requiring that no publicly traded company which must file annual and other reports with

the Securities and Exchange Commission may make any political expenditure in excess of a

certain amount in a fiscal year without first obtaining the authorization of a majority of the

shareholders.

Congress does not appear to have enacted legislation which provides shareholders with voting

authority concerning specific corporate expenditures. These matters have traditionally been left

for individual corporations to handle. Most decisions involving corporate expenditures are made

by corporate executives and boards of directors. Under the business judgment rule, if there is a

reasonable basis that a corporate transaction was made in good faith, management will typically

be immunized from liability. 47 Arguably, the business judgment rule applies to decisions of

management concerning corporate political expenditures.

However, this tradition of leaving corporate expenditure decisions to corporate executives does

not mean that Congress is without constitutional authority to enact legislation requiring

shareholder approval of corporate political expenditures. The Constitution’s Commerce Clause48

may arguably provide Congress with authority to enact legislation of the type in question. No

case specifically on point may be cited as precedent for upholding such legislation, but courts

have cited the Commerce Clause as providing Congress with constitutional authority to enact

various kinds of broad legislation concerning corporations. For example, several cases were

brought challenging the constitutionality of the Securities Act of 193349 and the Securities

Exchange Act of 1934.50 The cases upheld the constitutionality of these major federal securities

laws on the basis of Congress’s power under the Commerce Clause. 51 Although these cases are

approximately 70 years old, their holdings arguably remain within the philosophy of later

interpretations by courts of the Commerce Clause.

The Securities Act of 1933 ... does not attempt to regulate or prohibit the sale of securities in

intrastate commerce. It merely provides as a condition precedent to the use of the mails and

the facilities of interstate commerce that the issuer file a registration statement containing a

This portion of the report discussing shareholder notification and approval was written by (name redacted).

See CRS Report R41054, Campaign Finance Policy After Citizens United v. Federal Election Commission: Issues

and Options for Congress, by (name redacted).

The “business judgment rule … immunizes management from liability in corporate transaction undertaken within

both power of corporation and authority of management where there is reasonable basis to indicate that transaction was

made in good faith.” BLACK’S LAW DICTIONARY 181 (5TH ed. 1979).

“The Congress shall have Power ... To regulate Commerce with foreign Nations, and among the several States, and

with the Indian Tribes....” U.S. CONST. art. I, § 8, cl. 3.

15 U.S.C. §§ 77a et seq.

15 U.S.C. §§ 78a et seq.

See, e.g., Wright v. Securities and Exchange Commission, 112 F.2d 89 (2d Cir. 1940); Oklahoma-Texas Trust v.

Securities and Exchange Commission, 100 F.2d 888 (10th Cir. 1939); and Securities and Exchange Commission v.

Jones, 12 F. Supp. 210 (S.D.N.Y. 1935), aff’d 79 F.2d 617 (2d Cir. 1935), cert. granted in part, 297 U.S. 705 (1936),

cert. denied in part, 297 U.S. 705 (1936), rev’d in part on other grounds, 298 U.S. 1 (1936).

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

true and complete statement of the information required by Section 7 of the Act, 15 U.S.C.A.

§ 77g, in order to protect the public against imposition and fraud in the sale of securities

through the use of the mails or the facilities of interstate commerce.... It is well settled that

Congress may enact reasonable regulations to prevent the mails and the facilities of interstate

commerce from being used as instruments of fraud and imposition.52

The type of legislation described above would not prohibit corporate spending on political

advertising; rather, it would require that shareholders give their approval of the spending. It may

be argued that shareholders, as owners of a corporation, have virtually an inherent right, though

perhaps not necessarily the expertise, to direct spending by executives and boards of directors and

that legislation of the type in question would affirm this right.

Legislation requiring voting by shareholders on proposed corporate political advertising could

arguably be drafted in such a way as to act as a kind of impediment to the corporation’s free

speech as set out in Citizens United. For example, if a proposal required that a corporation submit

to shareholder vote each specific expenditure for political advertising and that the vote must occur

within an unreasonable period of time, a court might conclude that the legislation is a violation of

the corporation’s free speech rights as described by Citizens United. The practicalities of when to

require these votes and the enforcement of this kind of legislation may need to be carefully

considered in order not to run afoul of corporate freedom of speech rights defined by the Supreme

Court in Citizens United.

Restrictions on Foreign-Owned Corporations53

The Supreme Court in Citizens United struck down an attempt to limit First Amendment rights to

political speech based on the speaker’s “form” as a corporation.54 However, its doing so does not

necessarily mean that the ability to make campaign expenditures, or otherwise engage in political

speech, cannot be restricted based upon the speaker’s foreign status.55 Certain federal laws

already categorize some corporations incorporated within the United States as “foreign” because

of circumstances related to their ownership and control and impose significant restrictions upon

them. Congress could explore similar legislation in response to the Citizens United decision.56

Because of the lack of direct precedent, it is unclear how far Congress could go in this regard.57

Oklahoma-Texas Trust v. Securities and Exchange Commission, 100 F.2d 888, 890 (10th Cir. 1939).

This portion of the report discussing restrictions on foreign-owned corporations was written by (name redacted).

Citizens United, slip op., at 40.

Id. at 47-48.

Prior Congresses considered similar proposals, including amending the definition of “foreign national” to include

corporations with more than 50% foreign ownership, and the Federal Election Commission reportedly once proposed

similar rules. See, e.g., S. 2, 100th Cong., 1st Sess. (1987); S. 779, 100th Con., 1st Sess. (1987); H.R. 2499, 104th Cong.,

1st Sess. (1995); Foreign-Connected PACs Increased Gifts in ‘92 Races, POL. FIN. & LOBBY REP., Jan. 12, 1994, at 1.

Cf. Testimony of Heather K. Gerken, J. Skelly Wright Professor of Law, Yale Law School, Before the Senate

Committee on Rules and Administration, Feb. 2, 2010, available at http://rules.senate.gov/public/index.cfm?a=

Files.Serve&File_id=46b20c68-8e8b-44ba-a206-32703e280a4e (“We have relatively little guidance as to whether

preventing foreign influence on elections is a legitimate state interest or what level of scrutiny would be used to

evaluate such regulations.”).

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Foreign Corporations vs. Foreign-Owned Corporations under

Election Law

The corporations that are the targets of proposed legislation are incorporated within the United

States but are owned, to some degree, by foreign governments, corporations, or individuals, or

can otherwise be characterized as under “substantial foreign influence.”58 They are not foreign

corporations in the sense that they are incorporated under the laws of another country. Such

foreign corporations are among the “foreign nationals” currently prohibited from making

campaign contributions or expenditures under 2 U.S.C. § 441e(a).59 The constitutionality of this

prohibition was not at issue in Citizens United and has apparently never been challenged. 60

In contrast, U.S. corporations with some degree of foreign ownership or control were prohibited

from directly making campaign expenditures under 2 U.S.C. § 441b prior to Citizens United

because of their status as corporations, not because of their foreign ties. They could, however,

form political action committees (PACs) to make such expenditures. There were statutory and

regulatory limitations upon the involvement of foreign nationals in these PACs, but these

limitations were based on the alienage of the foreign nationals, not of the corporations. 61

Redefining “Foreign Nationals” to Include Foreign-Owned

Corporations

Many proposed bills would amend the existing definition of “foreign national” to include

corporations with some degree of foreign ownership or control.62 Such proposals could arguably

be characterized as contrary to the prevailing legal theory of the corporation, the “natural person

theory,” which views corporations as separate persons possessed of personalities and interests

distinct from those of their shareholders.63 However, there are instances where courts or statutes

effectively rely on alternate theories of the corporation,64 or otherwise look beyond the corporate

S. 2959, § 2.

“Foreign national” includes any “foreign principal” under 22 U.S.C. § 611(b), as well as individuals who are not U.S.

citizens or lawful permanent residents. 2 U.S.C. § 411e(b)(1)-(2). “Foreign principal” under 22 U.S.C. § 611(b)

includes foreign governments, corporations, and political parties “organized under the laws of or having [their]

principal place of business in a foreign country.” 22 U.S.C. § 611(b)(1) & (3).

Citizens United, slip op., at 118 (Stevens, J., dissenting) (“Although we have not reviewed them directly, we have

never cast doubt on laws that place special restrictions on campaign spending by foreign nationals.”).

See 2 U.S.C. § 441e(a) (prohibiting foreign nationals from funding the operation of the PAC); 11 C.F.R. §

110.4(a)(3) (“[Foreign nationals may not] direct, dictate, control, or directly or indirectly participate in the decisionmaking process of any political action committee.”).

The degree of foreign ownership varies, ranging from 5% of the total number of outstanding shares (H.R. 4517, § 2)

to 20% of the voting shares (S. 2959, § 2) to 50% or more (H.R. 4540, § 2).

See, e.g., Cannon Mfg. Co. v. Cuhady Packing Co., 267 U.S. 333 (1925); Herbert Hovenkamp, Enterprise and

American Law: 1836-1937 43 (1991).

For example, the “enterprise theory,” also known as the “unitary business theory,” treats the corporation and its

parent or subsidiaries as a single entity because of their common interests. See, e.g., Mobil Oil Corp. v. Comm’r of

Taxation of Vt., 445 U.S. 425 (1980) (upholding a tax on the income that corporations received in the form of

dividends from subsidiaries or affiliates doing business abroad); Copperweld v. Independence Tube Corp., 467 U.S.

752 (1984) (holding that, because of their common economic interests, a parent and subsidiary are incapable of

conspiring with each other for purposes of the Sherman Act); David Aronofsky, Piercing the Transnational Corporate

Veil: Trends, Developments, and the Need for Widespread Adoption of Enterprise Analysis, 10 N.C. J. INT’L L. &

COMM. REG. 31, 38-41 (1985) (“[The] notion [is] that the principal purpose of a multicorporate business entity is to

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Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

form to its shareholders.65 For example, federal statutes currently classify some U.S. corporations

as “foreign” because they have a certain percentage of foreign ownership.66

There is no constitutional provision that expressly permits Congress to enact such statutes, which

generally regulate foreign investment in the United States. 67 However, these statutes are

commonly justified by other federal powers mentioned in the Constitution, including federal

powers over immigration and naturalization;68 federal power to regulate interstate and foreign

commerce;69 and the power to provide for the national defense.70 These provisions, or similar

ones limiting the involvement of foreigners in the federal government, 71 could also be cited in

support of legislation restricting the political speech of foreign-owned or -controlled corporations.

In fact, there are already two instances within election law where parent corporations and their

subsidiaries are treated as a single entity.72

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achieve the economic welfare of the group as a whole through the integrated and coordinated activities of the individual

members.”).

Particularly where the courts are concerned, a court will look beyond a corporate form if a subsidiary acts as an agent

of the parent. The fact that a subsidiary is wholly owned is generally not enough. See, e.g., Delagi v. Volkswagenwerk,

278 N.E.2d 895, 897 (N.Y. 1972) (“[T]he [parent’s] control over the subsidiary’s activities … must be so complete that

the subsidiary is, in fact, merely a department of the parent.”); Frummer v. Hilton Hotels Int’l, Inc., 227 N.E.2d 851

(N.Y. 1967) (finding that the subsidiary acted as the agent of its parent). See also 29 U.S.C. § 623(g) (considering

evidence regarding interrelations of operations, common management, centralized control of labor relations, and

common ownership or financial control in determining whether a U.S. parent corporation’s control of a subsidiary

incorporated in a foreign country is such as to make the standards of the Age Discrimination in Employment Act

applicable to the foreign subsidiary).

See, e.g., 46 U.S.C. § 12102 (certain ships owned by U.S. corporations are eligible for documentation only if their

chief executive officer and the chairman of their board of directors are U.S. citizens and no more of their directors are

noncitizens than a minority of the number necessary to constitute a quorum); 49 U.S.C. § 40102 (prohibiting U.S.

corporations from registering aircraft unless (1) their president and two-thirds or more of their board of directors and

other managing officers are U.S. citizens; (2) the corporation is under the actual control of U.S. citizens; and (3) at least

75% of the voting interest is owned or controlled by U.S. citizens); 42 U.S.C. § 2133(d) (prohibiting corporations

believed to be controlled by foreign citizens or governments from obtaining licenses for nuclear facilities). There are

also provisions that define “U.S. citizens,” “U.S. exporters,” or “U.S. businesses” so as to include foreign corporations

with certain percentages U.S. ownership. See 15 U.S.C. § 4721(j)(3); 15 U.S.C. § 4724(e)(1)(C).

For more on this topic, see generally CRS Report RL33103, Foreign Investment in the United States: Major Federal

Statutory Restrictions, by (name redacted).

Art. I, § 8, cl. 4; Fiallo v. Bell, 430 U.S. 787 (1977).

Art. I, § 8, cl. 3; North Am. Co. v. Secs. & Exch. Comm’n, 327 U.S. 686 (1946); Elec. Bond Co. v. Secs. & Exch.

Comm’n, 303 U.S. 419 (1938).

Art. 1, § 8, cl. 12.

Then-Justice Rehnquist’s dissent in Sugarman v. Dougall, for example, notes that there are “no less than 11

instances” that distinguish citizens from foreigners in the Constitution: “Representatives, U.S. CONST. art. I, § 2, cl. 2,

and Senators, art. I, § 3, cl. 3, must be citizens. Congress has the authority ‘to establish an uniform Rule of

Naturalization’ by which aliens can become citizen members of our society, art. I, § 8, cl. 4; the judicial authority of the

federal courts extends to suits involving citizens of the United States ‘and foreign States, Citizens or Subjects,’ art. III,

§ 2, cl. 1, because somehow the parties are ‘different,’ a distinction further made by the Eleventh Amendment; the

Fifteenth, Nineteenth, Twenty-Fourth, and Twenty-Sixth Amendments are relevant only to ‘citizens.’ The President

must not only be a citizen but ‘a natural born Citizen,’ art. II, § 1, cl. 5.” 413 U.S. 634, 651-52 (1973).

2 U.S.C. § 441a(a)(5) (“For purposes of the limitations provided by paragraph (1) and paragraph (2), all contributions

made by political committees established or financed or maintained or controlled by any corporation, labor

organization, or any other person, including any parent, subsidiary, branch, division, department, or local unit of such

corporation, labor organization, or any other person, or by any group of such persons, shall be considered to have been

made by a single political committee.”); 11 C.F.R. § 114.5(g)(1) (“A corporation or a separate segregated fund

established by a corporation is prohibited from soliciting contributions to such fund from any person other than its

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Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

There does not appear to be any bright-line rule as to what percentage of foreign ownership

suffices for categorizing a corporation as “foreign” for statutory purposes. Rather, courts would

consider any percentages along with the other provisions of the statute when examining the

relationship between any challenged restrictions and the alleged government interests. Federal

laws that distinguish on the basis of alienage and do not affect fundamental rights, discussed

below, will generally be upheld so long as they are not “‘wholly irrational’ means of effectuating

a legitimate government interest.”73 In one of the few cases directly on point, Moving Phones

Partnership, L.P. v. Federal Communications Commission, the U.S. Court of Appeals for the

District of Columbia Circuit upheld Section 310(b) of the Communications Act and its

implementing regulations against an equal protection challenge brought by several partnerships

whose applications for authorization to construct and operate cellular systems were denied

because they were more than 20% foreign-owned. 74 The plaintiffs conceded that concerns about

national security constituted a legitimate reason for discriminating against aliens in broadcasting,

and the court found that limiting foreign ownership to no more than 20% was not a “wholly

irrational” means of effectuating that interest.75

Preventing foreign influence on U.S. elections has apparently never been recognized as a

legitimate state interest in the same way that national security was recognized in Moving Phones

and other cases. However, it seems plausible that a court would treat it as such given that

determining who can participate in the political process is arguably an inherent aspect of

sovereignty;76 there are other restrictions on non-citizens’ involvement in the political process

(i.e., lobbying and contributions);77 and certain provisions of the Constitution have been read as

indicating the Framers’ concerns about foreign involvement in U.S. politics.78

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stockholders and their families and its executive or administrative personnel and their families. A corporation may

solicit the executive or administrative personnel of its subsidiaries, branches, divisions, and affiliates and their

families.”).

Moving Phones Partnership, L.P. v. Federal Communications Commission, 998 F.2d 1051 (D.D.C. 1993). See also

Campos v. FCC, 650 F.2d 890 (7th Cir. 1981) (upholding a federal law prohibiting lawful permanent residents from

obtaining radio operator licenses); Noe v. FCC, 260 F.2 739 (D.D.C. 1958) (rejecting a claim that a Jesuit educational

institution is under alien control and therefore ineligible to operate a television station because the institution was

chartered by the state; holds its own property in trust for educational purposes; does not receive monetary support from

the Society of Jesus; and is directed by American citizens); In Re Request by Data Transmission Co., 52 F.C.C.2d 439

(1975) (noting that “Congress wanted to guard against actual alien control rather than the mere possibility of alien

control”). State and local laws are subject to a different standard of review and outside the scope of this report.

998 F.2d at 1056.

Id.

See, e.g., Zephyr Teachout, Extraterritorial Electioneering and the Globalization of American Elections, 27

BERKELEY J. INT’L L. 162, 185-87 (2009) (discussing sovereignty interests in restricting foreign participation in

elections); Lori Fisler Damrosch, Politics across Borders: Nonintervention and Noninforcible Influence over Domestic

Affairs, 83 AM. J. INT’L L. 1, 33-49 (1989) (discussing “state system values” in limitations on foreign participation in

elections).

2 U.S.C. § 441(e) (prohibiting campaign contributions); 22 U.S.C. §§ 611-621 (limitations on foreign lobbying).

See supra note 71.

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Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

First Amendment Rights

Because foreigners located abroad generally lack First Amendment rights,79 it seems possible that

some restrictions upon campaign expenditures or other political speech by foreign-owned

corporations could be upheld. 80 Also, the United States has a strong sovereign and constitutional

interest in limiting political participation to members of its polity. The nature of these restrictions

may, however, depend upon corporate structure and related considerations, as courts attempt to

reconcile the corporation’s “foreignness” with the general corporate rights to political speech

recognized in Citizens United. Some commentators have suggested that the Court’s intention, in

finding that an outright ban on corporate expenditures could not be justified as a protection

against foreign influence, “is clear: it does not want to license too broad a ban on all corporate

independent expenditures when there is no reason to think that foreign nationals exercise control

over the decision making.”81 Such commentators are probably correct in suggesting that

restrictions targeting small percentages of ownership, without the possibility of control, are more

suspect than restrictions targeting wholly owned subsidiaries of foreign governments.82 Beyond

the identity of the foreign owners and the degree of ownership, other considerations could include

whether foreign ownership is unitary or dispersed (i.e., does a single foreign owner own the entire

interest, or are there multiple owners?); whether ownership is direct or indirect; and what, beyond

ownership, suffices for control.83

Certain restrictions upon the political speech of foreign-owned or -controlled corporations could

also potentially be challenged on First Amendment grounds by U.S. citizens. Courts have

recognized that some restrictions on the speech of foreigners can abridge First Amendment rights

of U.S. citizens by, for example, denying them use of funds to finance this speech. In Mendelsohn

v. Meese, a U.S. district court upheld a challenged statute that prevented two U.S. citizens from

using funds from the Palestine Liberation Organization (PLO) to finance their speaking

Palestine Info. Office v. Schultz, 674 F. Supp. 910, 919 (D.D.C. 1987) (upholding application of the Foreign

Missions Act, 22 U.S.C. §§ 4301-4313, to close down an information office found to represent a foreign entity);

Pauling v. McElroy, 164 F. Supp. 390, 393 (D.D.C. 1958) (“The protection of the Constitution of the United States

does not extend to … nonresident aliens.”).

While the majority in Citizens United noted that it did not reach the question of “whether the Government has a

compelling interest in preventing foreign individuals or associations from influencing our Nation’s political process,”

this statement was dicta and does not necessarily mean that strict scrutiny would inevitably be applied to restrictions on

the political speech of foreign corporations. Citizens United, slip op., at 46-47.

Gerken supra note 57.

Some commentators have suggested that foreign governments represent a special case, for purposes of constitutional

rights, because their independent sovereignty places them entirely outside the constitutional structure. See, e.g., Lee M.

Caplan, The Constitution and Jurisdiction over Foreign States: The 1996 Amendment to the Foreign Sovereign

Immunities Act in Perspective, 41 VA. J. INT’L L. 369, 399 (2001) (“[F]oreign states, whether acting in a public or

private capacity, remain political entities that seek to further the public interests of the government. In other words,

they always act qua sovereign. Regardless of the form in which a foreign state participates in the world market, i.e.,

through its national bank or a government-owned corporation, and regardless of the commercial nature of the

transaction at issue, the foreign state acts at all times to improve its wealth or viability. By nature, the foreign state can

never shirk the essential attributes of sovereignty.”).

While many proposed bills treat ownership as synonymous with control, some bills recognize forms of control that

are independent of ownership. See, e.g., H.R. 4522, § 2 (amending the definition of “foreign national” to include

corporations with foreign principals on the board of directors, or whose debt or other obligations are directly or

indirectly held by foreign principals); S. 2959, § 2 (amending the definition of “foreign national” to include

corporations where foreign principals have the “power to direct, dictate, control, or directly or indirectly participate in

the decisionmaking process of the corporation with respect to activities in connection with a[n] … election,” or which

received a majority of its gross receipts for the prior fiscal year from two or more “foreign principals or individuals”).

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

throughout the U.S. on behalf of the PLO after applying the more lenient standard of review

applied to content-neutral speech.84 Similarly lenient review may be unlikely here, however, in

part because the majority in Citizens United noted that “[s]peech restrictions based on the identity

of the speaker are all too often simply a means to control content.”85 This could potentially be a

problem with restrictions on corporations with small percentages of foreign ownership because

the speech of the U.S. majority owners would be affected by these restrictions. 86

Vagueness

Certain proposed restrictions could potentially be challenged on the grounds that they are vague.

Due process under the Fifth Amendment requires that criminal statutes “give adequate guidance

to those who would be law-abiding, to advise defendants of the nature of the offense with which

they are charged, or to guide courts in trying those who are accused.”87 Statutes that fail to do this

will be held “void for vagueness.”88 Vagueness is of particular concern with governmental

restrictions on speech and has been used to void statutes involving loyalty oaths,89 obscenity and

indecency,90 and restrictions on public demonstrations.91 Some commentators have expressed

concerns that difficulties in determining corporate ownership, particularly in the case of

corporations whose stock is publicly traded, could raise vagueness issues because corporations

might not know whether they had the requisite percentage of foreign ownership.92 Similar

concerns could also arise because corporate ownership can shift over time, or because of

difficulties in determining what, beyond ownership, constitutes control or influence. 93 Such

concerns may be particularly apposite given that the majority in Citizens United suggested that

complicated regulations of speech can serve to unconstitutionally chill speech.94

Mendelsohn v. Meese, 695 F. Supp. 1474, 1476-77, 1482-83 (S.D.N.Y. 1988) (requiring the government to show

only that the challenged provision is within the government’s constitutional power in furtherance of an important or

substantial government interest that is unrelated to suppression of free expression and is no greater than essential to

further the government interests). See also Kleindienst v. Mandel, 408 U.S. 753 (1972) (upholding a visa denial despite

implication of the First Amendment rights of U.S. citizens).

Citizens United, slip op., at 31. The dissent in Citizens United would, in contrast, have treated the restrictions on

electioneering communications as a time, place, and manner restrictions, which are subject to more lenient scrutiny.

Citizens United, slip op., at 114 (Stevens, J., dissenting).

Cf. Mendelsohn, 695 F. Supp. at 1481 (stating that associating with or accepting money from the PLO does not place

American citizens outside the scope of constitutional protection).

Musser v. Utah, 333 U.S. 95, 97 (1948).

Cantwell v. Connecticut, 310 U.S. 296, 308 (1940).

See, e.g., Keyishian v. Bd. of Regents, 385 U.S. 589 (1967); Baggett v. Bullitt, 377 U.S. 360 (1964); Cramp v. Bd. of

Pub. Instruction, 368 U.S. 278 (1961).

See, e.g., Reno v. ACLU, 521 U.S. 844, 870-874 (1997); Interstate Circuit v. City of Dallas, 390 U.S. 676 (1968);

Joseph Burstyn, Inc. v. Wilson, 343 U.S. 495 (1952); Winters v. New York, 333 U.S. 507 (1948).

See, e.g., Cantwell, 310 U.S. at 296; Coates v. City of Cincinnati, 402 U.S. 611 (1971); Gregory v. City of Chicago,

394 U.S. 111 (1969).

See, e.g., Gerken, supra note 57 (“It may be necessary to target certain regulations at foreign shareholders rather than

corporations as such.”).

The Small Business Administration, for example, has a rule that spans four pages in the Code of Federal Regulations

defining what constitutes “control” for purposes of the 8(a) Minority Business Development Program. See 13 C.F.R. §

124.106.

Citizens United, slip op. at 18 (“As a practical matter, however, given the complexity of the regulations and the

deference courts show to administrative determinations, a speaker who wants to avoid threats of criminal liability and

the heavy costs of defending against [Federal Election Commission] enforcement must ask a government agency for

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Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Conditioning Government Contracts or Grants on

Forgoing Right to Political Speech95

Efforts by the federal government to restrict private, nongovernmental entities from using their

own (non-federal) resources to engage in independent political advocacy or other political

communications as a condition to receiving, or because the entity receives, some federal funding

by way of grants or contracts would raise significant First Amendment concerns. Congress may

certainly limit, regulate, or condition the use of the funds it appropriates,96 and there are now

under federal law and regulation several prohibitions and multiple restrictions on the use by

private recipients of federal funds or federal subsidies for political or advocacy purposes. 97 When

the government goes beyond restrictions and conditions on the use of the funds it appropriates,

however, (or goes beyond attempts to control or “define” the content of a government program98),

and seeks to institute a direct suppression of independent political advocacy by private entities as

a condition to receive (or as a consequence of receiving) federal funds, then such legislation must

be examined under the heightened scrutiny of First Amendment principles. The Supreme Court

has noted that restrictions on otherwise constitutionally protected activities could not be “justified

simply because” persons were receiving federal funds, nor was “a lesser degree of judicial

scrutiny ... required simply because Government funds were involved.”99

“Unconstitutional Conditions” on the Receipt of Federal Funds

The Supreme Court has in the past ruled “that the government may not deny a benefit to a person

because he exercises a constitutional right.”100 The principle has thus developed in a line of cases

that the government may not condition the receipt of a public benefit upon the requirement of

relinquishing one’s protected First Amendment rights.101 Although it is true that a private

(...continued)

prior permission to speak. These onerous restrictions thus function as the equivalent of prior restraint.”) (internal

citations omitted).

This portion of the report discussing restrictions on government contractors and grantees was written by (name

redacted), and was derived from and is a summary of CRS Report RL34725,

“Political” Activities of Private Recipients

of Federal Grants or Contracts, by (name redacted), at 21-33.

Cincinnati Soap Co. v. United States, 301 U.S. 308, 321-322 (1937).

OMB Circular A-122, Attachment B, para. 25, as added 49 F.R. 18276 (1984) (restrictions on non-profit grantees);

Federal Acquisition Regulation for commercial contractors and nonprofit contractors of the federal government, 48

C.F.R. § 31.205-22 (commercial contractors); 48 C.F.R. § 31.701 et seq., (non-profit contractors); “Byrd Amendment,”

31 U.S.C. §§ 1352, see common rules by major agencies, 55 F.R. 6738, February 26, 1990 (and OMB governmentwide guidance, 54 F.R.52306, December 20, 1989 upon which the rules were based); 18 U.S.C. § 1913, and various

yearly appropriations law riders.

As to government program restrictions or limitations, however, the Supreme Court found: “Congress cannot recast a

condition on funding as a mere definition of its program in every case, lest the First Amendment be reduced to a simple

semantic exercise.” Legal Services Corporation v. Velazquez, 531 U.S. 533, 547 (2001).

FCC v. League of Women Voters, 468 U.S. 364, 401 n.27 (1984).

100

Regan v. Taxation With Representation of Washington, 461 U.S. 540, 545 (1983).

101

Note “unconstitutional conditions” cases, including Perry v. Sinderman, 408 U.S. 593 (1972); Speiser v. Randall,

357 U.S. 513 (1956); Regan v. Taxation With Representation of Washington, 461 U.S. at 545, see also 461 U.S. at

552-553 (Blackman, J. concurring) (1983); FCC v. League of Women Voters, 468 U.S. 364, 381 (1984). Compare with

Rust v. Sullivan, 500 U.S. 173, 196 (1991).

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Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

organization may simply choose to forgo participating in political or public policy advocacy to be

eligible to receive a grant or a contract, and although no one has a “right” to participate in or

receive funding, the Supreme Court under the so-called “unconstitutional conditions” cases has in

the past established the principle that the receipt of a federal benefit may not be conditioned upon

abdicating one’s constitutional rights, particularly one’s First Amendment freedom of speech:

For at least a quarter-century, this Court has made clear that even though a person has no

“right” to a valuable governmental benefit and even though the government may deny him

the benefit for any number of reasons, there are some reasons upon which the government

may not rely. It may not deny a benefit to a person on a basis that infringes his

constitutionally protected interests—especially, his interest in freedom of speech. For if the

Government could deny a benefit to a person because of his constitutionally protected speech

or associations, his exercise of those freedoms would in effect be penalized and inhibited.

This would allow the government to “produce a result which [it] could not command

directly.” Speiser v. Randall, 357 U.S. 513, 526. Such interference with constitutional rights

is impermissible.102

In 1996 the Court recognized “the right of independent contractors not to be terminated for

exercising their First Amendment rights.”103 This principle, noted the Court, expressly applied to

and derived from judicial decisions negating attempts to condition the receipt of government

contract funds on the abdication of one’s First Amendment rights of speech and advocacy.104

The Supreme Court under this line of cases invalidated a federal law which would have placed an

advocacy restriction on any recipient of particular grants from a federally funded program (public

broadcasting) in Federal Communications Commission v. League of Women Voters of

California.105 Although broadcast stations might be required to follow certain fairness guidelines,

the Court found that such broadcasters, merely because they receive some federal funding

through the Corporation for Public Broadcasting, could not be prohibited from providing their

own expression and opinions on matters of public interest, as the ban was not narrowly tailored to

sufficiently address the government’s asserted justifications for such restrictions on speech. 106

In Citizens United, one of the arguments for maintaining the statutory restriction on independent

corporate campaign expenditures was that the corporation had been granted by law certain

benefits and privileges, and as a condition to receive such government-granted benefits, the

corporations could be denied their First Amendment right to engage in political expression in

making independent campaign expenditures. 107 The Supreme Court, however, summarily

dismissed such notion that government benefits could be given in this situation on the condition

of forfeiting or forgoing First Amendment privileges:

102

Perry v. Sinderman, 408 U.S. 593, 597 (1972).

Board of Commissioners v. Umbehr, 518 U.S. 668, 686 (1996).

104

See 518 U.S. at 680, and the Court’s explanation of “[o]ur unconstitutional conditions precedents ....”

105

468 U.S. 364 (1984).

103

106

468 U.S. at 399-401. In Speiser v. Randall, 357 U.S. 513, 518 (1956), the Supreme Court found that the state may

not place a condition on eligibility for a tax-exemption on a basis that violates one’s First Amendment freedoms of

speech, expression, and association: “To deny an exemption to claimants who engage in certain forms of speech is in

effect to penalize them for such speech.” See discussion in Regan v. Taxation With Representation of Washington, 461

U.S. at 545, specifically 461 U.S. at 552-553 (Blackman, J. concurring).

107

Citizens United, slip op. at 34-35.

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Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

[T]he Austin majority undertook to distinguish wealthy individuals from corporations on the

ground that “[s]tate law grants corporations special advantages—such as limited liability,

perpetual life, and favorable treatment of the accumulation and distribution of assets.” 494

U.S. at 658-659. This does not suffice, however, to allow laws prohibiting speech. “It is

rudimentary that the State cannot exact as the price of those special advantages the forfeiture

of First Amendment rights.”108

It is therefore questionable under this line of cases whether general or broad-based restrictions on

independent expenditures for political speech and advocacy of all private individuals, firms,

associations, or corporations could be instituted as a “condition” to receiving a federal grant or a

federal contract. It is noted that under current federal law, a government contractor is prohibited

from making a campaign “contribution.”109 Under the theory that campaign contributions to

candidates have a significant potential for quid pro quo corruption, the Supreme Court, in

overturning the corporate campaign independent “expenditure” prohibition, left intact the

limitation on such corporate campaign “contributions.” Campaign contributions to candidates or

parties (and their potential for corrupting influences) have been clearly distinguished by the

Supreme Court from independent campaign “expenditures.” Such independent expenditures in

campaigns are afforded greater First Amendment protection as speech, and are apparently not

subject to the same considerations of potential corruption or corrupting influence because of the

absence of pre-arrangement or coordination with the candidate or the candidate’s campaign:

The Buckley Court recognized a “sufficiently important” government interest in “the

prevention of corruption and the appearance of corruption.” Id., at 25; see id., at 26. This

followed from the Court’s concern that large contributions could be given “to secure a

political quid pro quo.” Ibid.

The Buckley Court explained that the potential for quid pro quo corruption distinguished

direct contributions to candidates from independent expenditures. The Court emphasized that

“the independent expenditure ceiling ... fails to serve any substantial governmental interest in

stemming the reality or appearance of corruption in the electoral process,” id., at 47-48,

because “[t]he absence of prearrangement and coordination ... alleviates the danger that

expenditures will be given as a quid pro quo for improper commitments from the candidate,”

id., at 47.110

The Court then concluded in Citizens United:

Limits on independent expenditures ... have a chilling effect extending well beyond the

Government’s interest in preventing quid pro quo corruption. The anticorruption interest is

not sufficient to displace the speech here in question.

***

For the reasons explained above, we now conclude that independent expenditures, including

those made by corporations, do not give rise to corruption or the appearance of corruption.111

108

Id. at 34-35, citing Austin, 494 U.S. at 680 (Scalia, J. dissenting).

2 U.S.C. § 441c.

110

Citizens United, slip op. at 29.

111

Citizens United, slip op. at 41-42 (emphasis added).

109

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The same considerations in allowing an exception to First Amendment principles in prohibiting

contractor “contributions” to candidates, therefore, may not necessarily be present to justify a

similar government restriction on contractor “expenditures” for independent political speech.

Government Program Restrictions and “Government Speech”

It is obvious that Congress may and does institute various conditions and requirements on the

receipt of federal funds. Although the cases discussed above were found to constitute an

“unconstitutional condition” on the receipt of federal funds by private parties, the Supreme Court

has permitted the government to require a restriction on the use of a recipient’s own funds for

certain speech within a particular program when that program is even partially funded with

federal funds. In Rust v. Sullivan,112 the Court explained that in prohibiting abortion counseling by

private entities within certain federally supported programs the government did not place a

“condition on the recipient of the subsidy,” but rather placed the restrictions on the “particular

program or service” which “merely require that the grantee keep such activities separate and

distinct from the” publicly funded activities. 113 Chief Justice Rehnquist, writing for the Court,

distinguished this situation from the “unconstitutional conditions” cases:

In contrast, our “unconstitutional conditions” cases involve situations in which the

Government has placed a condition on the recipient of the subsidy rather than on a particular

program or service, thus effectively prohibiting the recipient from engaging in the protected

conduct outside the scope of the federally funded program.114

More recently, the Supreme Court has noted that when the government funds activities it may

limit, restrict, and fashion the speech of those speaking on its behalf either as “government

speech,” or when the government uses “private speakers to transmit specific information

pertaining to its own programs.”115 The Court explained that “[w]hen the government disburses

public funds to private entities to convey a governmental message, it may take legitimate and

appropriate steps to ensure that its message is neither garbled nor distorted by the grantee.”116

This “exception” to the First Amendment for “government speech,” or for certain private speech

within the parameters of some government programs, would not, in any event, extend to all

activities and programs of individuals or private entities which receive government funds. In

Legal Services Corporation v. Velazquez,117 the Court overturned a restriction on the Legal

Services Corporation’s grantees “lobbying” for changes in welfare legislation as part of legal

representation of indigent clients. The Court found that even though the legal services program

was government funded, and thus the speech that the government wished to limit by statute was,

112

500 U.S. at 173 (1991).

Id. at 196.

114

Id. at 197. See also “voluntary” expenditure limitation on campaign expenses when a candidate agrees to accept

federal funds. That provision was not directly challenged, and its constitutionality was not before the Court in Buckley.

424 U.S. at 87 n. 119. The Court, however, appeared to favor such provision since it believed that providing federal

funds to private parties for political campaigning enhanced, rather than restricted, opportunities for public

communication: “Subtitle H is a congressional effort, not to abridge, restrict or censor speech, but rather to use public

money to facilitate and enlarge public discussion and participation....” 424 U.S. at 92-93.

115

Legal Services Corporation v. Velazquez, 531 U.S. 533, 541 (2001).

113

116

Rosenberger v. Rector and Visitors of the University of Virginia, 515 U.S. 819, 833 (1995), citing Rust, supra at

196-200 (emphasis added).

117

531 U.S. 533 (2001).

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in fact, within the confines of that program (as in Rust), the activity and speech involved, that is,

lobbying the legislature on behalf of a client, could not be considered “government speech,” and

thus was not subject to regulation under the “government speech” doctrine.118

Along a somewhat similar line as the “government speech” concept may be situations where

private organizations serve as what might be described as surrogates or stand-ins for government

agencies, to perform “governmental functions” of administering and disbursing public funds. In

some of these instances federal law has treated these private organizations, for purposes of

restrictions on the partisan political activities of their employees, as “state or local” governmental

agencies under the provisions of the Hatch Act.119 If a contract or a grant were thus given to

perform what might be considered “governmental functions,” or to have private parties serve as

surrogates for government officials in administering or managing certain public programs, then

arguments could be made that the government could then limit political speech or activities of

such private participants in the program under the “government speech” guidelines, or under a

similar rationale as the Hatch Act, to protect the fair administration of government programs. The

Supreme Court in Citizens United noted that there is “a narrow class of speech restrictions” which

may be permissible, such as in the Hatch Act (citing the Letter Carriers case, 413 U.S. 548

(1973)), “based on an interest in allowing governmental entities to perform their functions.”120

Such rationale, however, would not appear to be strong in the case of private contractors who are

merely providing goods or selling products to the government.

Governmental Interest Promoted by the Legislation; Least

Restrictive Means of Accomplishing Objective

When a provision of law limits or interferes with First Amendment rights, the Supreme Court will

engage in what it terms “strict scrutiny” to examine the law and its purposes to determine,

initially, if there are significant, “overriding,” or “compelling” governmental interests in the

restriction that outweigh the impositions on First Amendment rights.121 If there are such

governmental interests in the suppression of speech, the Court will then examine whether the

restriction is sufficiently tailored to promote those interests asserted as the law’s justification.

There are several governmental interests which might arguably be promoted by a prohibition on

“independent expenditures” by government contractors or grantees, and such interests would need

to be analyzed under the Supreme Court’s standards. The interests of the prevention of corruption

of the electoral process and undue influences on candidates and officeholders, for example, have

been found to be important governmental interests which may justify, in some cases, certain

limitations or burdens on First Amendment activities.122 Even while such interests have been

found to be significant, however, the Court has struck down restrictions on advocacy and political

118

Id. at 542-543.

119

5 U.S.C. §§ 1501 et seq. Note Community Services Block Grant Program 42 U.S.C. § 9918(b)(1), and the Head

Start program, 42 U.S.C. § 9851(a).

120

Citizens United, slip op. at 24-25.

121

Citizens United, slip op. at 23-25.

122

Buckley, 424 U.S. 1 (1976); McConnell v. Federal Election Commission, 540 U.S. 93, 143 (2003): “Our cases have

made clear that the prevention of corruption or its appearance constitutes a sufficiently important interest to justify

political contribution limits.”

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activities which were not narrowly tailored to meet the objective of preventing such undue

influence or the appearance of corruption.123

In relation to the interest of preventing “corruption,” the Supreme Court has found that although

such governmental interest is compelling, that interest is not necessarily advanced by restricting

“independent expenditures” by private entities in political campaigns. In Buckley v. Valeo, the

Supreme Court found “that the governmental interest in preventing corruption and the appearance

of corruption [was] inadequate to justify [the ban] on independent expenditures.”124 Similarly, the

Court found in Citizens United that a prohibition on “independent expenditures” does not advance

in a sufficient manner the interest of preventing corruption: “[W]e now conclude that independent

expenditures, including those made by corporations, do not give rise to corruption or the

appearance of corruption.”125 For this reason, it would seem that legislation which would restrict

all private parties (or merely all corporations) receiving federal contracts or grants from engaging

in independent political expenditures with their own non-governmental resources, may not

necessarily advance the interest in the prevention of “corruption” of candidates or officeholders.

As noted by the Supreme Court in Citizens United, the absence of any pre-arrangement or

coordination with the candidate in the making of an “independent expenditure” by a private entity

mitigates against a corrupting influence or quid pro quo agreement, and thus does not necessarily

reach the concerns in so-called “pay to play” corruption schemes.126

A governmental interest in attempting to “balance” competing voices in public policy or

campaign debate, by limiting expression of one group over another, was found by the Supreme

Court not to be a compelling interest to justify suppression of speech. The Supreme Court thus

rejected the so-called “antidistortion” rationale that would attempt to limit the influence of

monied interests over less well-funded persons or groups in a political campaign.127

If the governmental purpose is not to prevent corruption of candidates or governmental processes,

then such interest may be to protect government funds and programs. In such case the interests

may be two-fold: one would be to prevent the use and diversion of federal government funds for

private political or public policy advocacy activities which are not authorized by Congress; and

the second would be to prevent the federal government “subsidizing” political advocacy activities

of private parties by providing such private parties with federal dollars for other purposes.

Clearly the federal government need not “pay for,” nor directly “subsidize,” the political

advocacy or lobbying of private entities. 128 To that end, current federal provisions already

123

Buckley at 39-51 (independent expenditures); First National Bank of Boston v. Bellotti, 435 U.S. 765 (1978)

(corporate expenditures on ballot measures); Federal Election Commission v. Massachusetts Citizens for Life, Inc., 479

U.S. 238 (1986) (non-stock, non-business corporations and electioneering communications); Citizens United v. Federal

Election Commission, No. 08-205 (U.S. January 21, 2010) (corporate campaign “expenditures.”)

124

Buckley at 45, as quoted in Citizens United, slip op. at 40.

125

Citizens United, slip op. at 42.

126

Any campaign “expenditure” which is coordinated or pre-arranged with a candidate is not an “independent

expenditure” under federal law (11 C.F.R. § 100.16), but rather is to be treated as an in-kind “contribution” to a

candidate (11 C.F.R. Part 109.20(b)), prohibited for corporations and contractors. It should be noted that a state

Supreme Court recently overturned a state provision of law which had banned campaign contributions from all state

contractors which received sole-source contracts, as an unconstitutionally over broad intrusion into First Amendment

rights. Dallman v. Ritter, No. 09SA224 (Co. 2/ 22/2010).

127

Citizens United, slip op. at 35-40.

128

Regan v. Taxation With Representation, 461 U.S. at 544-546; Cammarano v. United States, 358 U.S. 498 (1959).

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expressly bar the use of contract or grant funds by private recipients for political or lobbying

purposes, or the paying for or “charging off” of expenses for political advocacy or lobbying to

any government contract or grant; and provide criminal penalties for the diversion of government

funds to non-authorized purposes. Such limitations are less restrictive means of providing

assurances concerning the proper use of government funds than a ban on all political speech by

private recipients with their own resources. If the interest of the government is merely to avoid a

direct subsidy for private political activities out of public monies, then a restriction in any

proposed legislation which barred all privately funded advocacy by grant or contract recipients

might arguably, in the first instance, be considered “over-inclusive” because it reaches activities,

speech, and conduct paid for completely with private, non-federal monies, as well as privately

funded activities wholly outside of the realm of the federal program. As such, the restriction may

arguably be found, with respect to otherwise protected First Amendment speech and conduct, to

be unnecessarily over-broad and burdensome on such First Amendment rights.129

A further interest of the government forwarded by legislation might also arguably be to prevent

an “indirect” subsidy for groups which engage in political advocacy by providing such groups

with federal funds for other non-advocacy activities, goods, or services which the government

desires. The argument in such case would be that money is “fungible,” and thus grants and

contracts for proper public purposes to private groups “frees up” other non-federal money which

the private contractor or grantee may then use for any purposes, including campaign or public

policy advocacy activities. The Supreme Court, however, in another context, has found that a

grant for one purpose is not a subsidy of the other, non-federally funded activities, and expressly

rejected the “fungibility” of funds argument as a justification to prohibit federal funding of an

organization engaging in First Amendment activities.130

Other Government Interests or Narrower Tailoring Sufficient to

Justify Restrictions Involving Government Contractors131

While conditioning the political speech of all government contractors upon their forgoing their

rights to political speech seems likely to raise significant First Amendment issues, as discussed in

prior sections, it is possible that the government could assert hitherto unrecognized interests in

such conditions, especially if any restrictions targeted specific categories of contractors.

Alleged government interests in preventing contractors from using the “wealth” generated by

their dealings with the government to influence the political process,132 or in avoiding the

appearance of corruption created when “contractors endorse their friends in power,”133 may be

insufficient to support conditions affecting all government contractors in the aftermath of Citizens

129

See, e.g., FCC v. League of Women Voters, 468 U.S. at 399-401.

In Committee for Public Education and Religious Liberty v. Regan, 444 U.S. 646, 658 (1980), the Court specifically

found that providing grant funds to a religious organization for one (secular) purpose, does not constitute a federal

“subsidy” of the other, private, non-federally funded religious activities of the organization under the “fungibility”

argument. See also Hunt v. McNair, 413 U.S. 734,743 (1973).

131

This portion of the report discussing other government interests or narrower tailoring was written by (name re

dacted).

132

See, e.g., Bruce Ackerman & Ian Ayres, Despite Court Ruling, Congress Can Still Limit Campaign Finance, Wash.

Post, pg. A15 (noting that “almost three-quarters of the largest 100 publicly traded firms are federal contractors”).

133

Id.

130

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United. The majority in Citizens United found such interests were insufficient to justify a ban on

campaign expenditures and electioneering by all corporations,134 a conclusion which it reached

after considering the various “types” of corporations affected by such prohibitions.135

Commentators have alleged other interests that the government could potentially assert in

targeting government contracts, such as safeguarding the integrity of the procurement process136

and protecting contractors from being required to “pay for play.”137 However, no court appears to

have recognized these interests as compelling governmental interests justifying restrictions on

First Amendment rights, and courts may find that such interests are insufficient to justify acrossthe-board restrictions given the wide variety of “types” of government contractors and means by

which they into enter contracts with the government.138

Such alleged interests might more plausibly be asserted with narrower restrictions targeting

specific types of contractors. For example, the appearance of quid pro quo corruption of the sort

that the majority in Citizens United recognized as sufficient to uphold limitations on campaign

contributions is arguably stronger with contracts that are “earmarked” for certain entities as part

of the congressional appropriations process than with other contracts.139 Contractors performing

“functions approaching inherently governmental,” “critical functions,” or “mission essential

functions,” could perhaps be similarly targeted on an analogy to the Hatch Act, which bars federal

employees from express endorsements,140 although any such legislation could raise constitutional

concerns about vagueness141 given recent disputes over whether particular functions qualify as

such.142 “Personal service contracts,” or contracts that, by their express terms or as administered,

make contractor personnel appear to be government employees, could perhaps also be targeted

based on this analogy.143

134

Citizens United, slip op., at 32-45.

Id. at 38.

136

Testimony of Donald J. Simon, Partner, Sonosky, Chambers, Sachse, Endreson & Perry, LLP, Before the House

Judiciary Committee, Subcommittee on the Constitution, Civil Rights, and Civil Liberties, Feb. 3, 2010, available at

http://judiciary.house.gov/hearings/pdf/Simon100203.pdf.

137

Testimony of Laurence H. Tribe, Carl M. Loeb University Professor and Professor of Constitutional Law, Harvard

University Law School, Before the House Committee on the Judiciary, Subcommittee on the Constitution, Civil Rights

and Civil Liberties, Feb. 3, 2010, available at http://judiciary.house.gov/hearings/pdf/Tribe100203.pdf.

138

While Ackerman and Ayres, supra note 132, point out that “almost three-quarters of the largest 100 publicly traded

firms are federal contractors,” such companies are arguably not representative of all government contractors. See, e.g.,

U.S. Small Bus. Admin., FY2008 Government-wide Scorecard, available at http://www.sba.gov/idc/groups/public/

documents/sba_homepage/goals_08_gov_wide.pdf (noting that small businesses receive over 20% of federal contract

and subcontract dollars); Grant Thornton, 15th Annual Government Contractor Industry Highlights Book 4, 6 (2010)

(reporting that 81% of responding contractors were privately held and that 71% had profit rates below 10%). Moreover,

their contracts result from the government’s exercise of various source selection methods, ranging from the Federal

Supply Schedules, which are catalog-like listings of goods and services whose prices are set based upon the price that

the contractor gives its best private-sector customer, to negotiated procurements, which can involve protracted

discussions between the government and contractor. See 48 C.F.R. Parts 13-18.

139

This presumes that earmarked contracts are not competitively awarded. The 111th Congress has, however, subjected

earmarks for for-profit entities to competition requirements. See, e.g., Department of Defense Appropriations Act,

2010, P.L. 111-118, § 8211,—Stat.—(Dec. 19, 2009).

140

Cf. Ackerman & Ayres, supra note 145.

141

See, e.g., Connally v. Gen. Constr. Co., 269 U.S. 385, 391 (1926) (noting that when laws are vague people “of

common intelligence must necessarily guess at [the law’s] meaning and differ as to its application.”).

142

See generally CRS Report R40641, Inherently Governmental Functions and Department of Defense Operations:

Background, Issues, and Options for Congress, by (name redacted), (name redacted), and (name redacted).

143

48 C.F.R. § 2.101. Government agencies may not award personal services contracts unless specifically authorized

(continued...)

135

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Government contractors that are foreign governments, corporations, or individuals are prohibited

from making campaign contributions or expenditures under a separate statute whose

constitutionality has apparently never been challenged. 144

Taxation of Corporate Campaign-Related

Expenditures145

Some have proposed that Congress enact an excise tax on the corporate campaign-related

expenditures permitted under Citizens United. As discussed below, there are several existing taxes

that apply to tax-exempt organizations, including those that are incorporated. For purposes of this

discussion, it is assumed that any proposed tax would apply to both for-profit and non-profit

corporations, and, in the case of incorporated tax-exempt organizations, be in addition to the

existing taxes. It is also assumed that the expenditures would be non-deductible under IRC §

162(e) as a trade or business expense. 146

Congress has broad powers to tax under the Constitution.147 In general, tax distinctions and

classifications are constitutionally permissible so long as “they bear a rational relation to a

legitimate governmental purpose.”148 The rational basis standard is a low level of review by a

court. In the tax context in particular, courts typically show great deference in recognition of “the

large area of discretion which is needed by a legislature in formulating sound tax policies.”149 At

the same time, not all exercises of Congress’s taxing power receive such deference. Sometimes,

tax provisions are subject to higher levels of scrutiny. For example, tax provisions based on the

content of speech are, like non-tax provisions, subject to strict scrutiny. 150 A provision subject to

this highest level of scrutiny must be necessary to serve a compelling government interest and be

narrowly drawn to achieve that end.151 This is a heavy burden for the government to meet.

The decision by Congress to impose a tax on certain corporate expenditures would typically

appear to be within its broad taxing powers and subject to minimal review by a court.152 It could,

(...continued)

by statute to do so. See 48 C.F.R. § 37.104(b).

144

2 U.S.C. § 441e.

145

This portion of the report discussing a corporate independent expenditure tax was written by (name redacted).

146

Under IRC § 162(e), taxpayers are generally not allowed to deduct campaign and lobbying expenditures as a trade

or business expense. Additionally, § 162(e) denies a deduction for the portion of dues paid to a tax-exempt organization

that is used for these purposes. The provision only applies if the organization notifies the taxpayer of the portion that is

non-deductible. If an organization fails or chooses not to notify the taxpayer of the disallowed amount, then the

organization is subject to a proxy tax on that amount under IRC § 6033.

147

U.S. CONST. art. I, § 8, cl. 1 (“The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises

….”).

148

Regan v. Taxation with Representation of Washington, 461 U.S. 540, 547 (1983).

149

Id. at 547 (internal quotations omitted).

150

See Arkansas Writers’ Project, Inc. v. Ragland, 481 U.S. 221 (1987) (striking down a state sales tax that taxed

general interest magazines, but exempted newspapers and religious, professional, trade, and sports magazines).

151

See id. at 231.

152

Cf. Comm’r v. Tellier, 383 U.S. 687, 693 (1966) (quoting Comm’r v. Sullivan, 356 U.S. 27, 28 (1958)) (“Deduction

of expenses falling within the general definition of §162(a) may, to be sure, be disallowed by specific legislation, since

deductions are a matter of grace and Congress can, of course, disallow them as it chooses …”).

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nonetheless, be argued that a more rigorous analysis should apply when, as here, the tax is related

to the exercise of a constitutional right. Any analysis of whether Congress could enact an excise

tax on corporate political expenditures is severely limited by the fact that it does not appear there

is case law analyzing the constitutionality of a similar tax. Even so, it appears an excise tax could

potentially raise significant constitutional concerns since, depending on the particulars of a

specific proposal, it could be characterized as a penalty on protected speech.153

The Supreme Court has upheld provisions that provide disfavorable tax treatment to a taxpayer’s

campaign activities under the rationale that there is no requirement for the federal government to

subsidize the constitutional rights of taxpayers. In Cammarano v. United States,154 the Court

upheld the validity of a tax regulation that disallowed a business deduction for lobbying

expenditures. The taxpayers had been denied a deduction for amounts paid to a professional

organization to lobby against a state initiative that would have had dire consequences for their

business. They argued the disallowance violated the First Amendment, relying on a previous case,

Speiser v. Randall.155 In Speiser, the Court had struck down a state property tax exemption that

required taxpayers take a loyalty oath on the grounds that the state’s tax administration

procedures did not afford adequate due process. In striking down the provision that was clearly

“aimed at the suppression of dangerous ideas,” the Court emphasized its chilling effect on the

proscribed speech and equated it to a fine for engaging in that type of speech.156

In Cammarano, the Court rejected the claim that Speiser was controlling, reasoning that the

nondiscriminatory disallowance of a deduction for lobbying expenditures was different because,

unlike the provision in Speiser, it was not intended to suppress dangerous ideas.157 Instead, the

Court explained, the taxpayers “are not being denied a tax deduction because they engage in

constitutionally protected activities, but are simply being required to pay for those activities

entirely out of their own pockets, as everyone else engaging in similar activities is required to do

under” the tax laws.158 The Court further explained that the disallowance “express[ed] a

determination by Congress that since purchased publicity can influence the fate of legislation

which will affect, directly or indirectly, all in the community, everyone in the community should

stand on the same footing as regards its purchase so far as the Treasury of the United States is

concerned.”159

In a subsequent case, Regan v. Taxation With Representation of Washington,160 the Court

addressed a similar issue in upholding the federal law that limits the lobbying of § 501(c)(3)

organizations to “no substantial part” of their activities. The Court rejected the argument that the

153

See, e.g., Grosjean v. American Press Co., 297 U.S. 233, 250-51 (1936) (striking down a state tax that applied only

to large newspapers, because “in the light of its history and of its present setting, it is seen to be a deliberate and

calculated device in the guise of a tax to limit the circulation of information to which the public is entitled in virtue of

the constitutional guaranties” and has “the plain purpose of penalizing the publishers and curtailing the circulation of a

selected group of newspapers”).

154

358 U.S. 498 (1959).

155

357 U.S. 513 (1958).

156

Id. at 519 (internal quotations omitted).

157

See id. at 513.

158

Id.

159

Id.

160

461 U.S. 540 (1983).

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limitation infringed on the organization’s First Amendment rights.161 Rather, the Court, noting it

had held in Cammarano that the First Amendment does not require the federal government to

subsidize lobbying, explained that “Congress has merely refused to pay for the lobbying out of

public moneys” and stated that it “again reject[s] the notion that First Amendment rights are

somehow not fully realized unless they are subsidized by the State.”162

An excise tax on corporate campaign expenditures would not, in general, appear to be supported

by the non-subsidization rationale discussed in Cammarano. Instead, depending on the specifics

of the proposal, a court might find the tax to be a restriction on speech, perhaps comparably

onerous to the prohibition struck down in Citizens United, which would then place a heavy

burden on the government to justify the provision.163 It is not possible to say how a court would

analyze a proposal; however, characteristics that might affect the analysis could include the rate

of tax (e.g., a high rate might look more like a restriction or de facto prohibition); the scope of

taxpayers subject to the tax (e.g., a court might look less favorably at a tax limited to certain

taxpayers); the scope of activities subject to tax (e.g., a generally applicable tax might be less

scrutinized than one that applies only to campaign expenditures);164 and the purpose of the tax

(e.g., a court might look differently at a tax enacted as part of a campaign finance regulatory

regime than one with other regulatory or traditional revenue raising purposes).

Proponents of an excise tax on corporate campaign expenditures might point to the existence of

several taxes that apply to tax-exempt organizations making political expenditures for support of

the idea that Congress could enact such a tax; for example:

•

IRC § 527(f) imposes a tax on § 501(c) organizations that make expenditures for

influencing elections or similar activities. The tax is imposed at the highest

corporate rate on the lesser of the expenditures or the organization’s net

investment income.

•

IRC § 4955 imposes a tax on § 501(c)(3) organizations making campaign

expenditures. These organizations are prohibited under the tax laws from making

these types of expenditures. The tax equals 10% of the expenditures, with an

additional 100% tax imposed if the expenditures are not corrected in a timely

manner.

•

IRC § 4945 imposes a similar tax on the political expenditures of private

foundations, although it covers a broader range of activities, some of which fall

outside the § 501(c)(3) campaign intervention prohibition. Private foundations

are § 501(c)(3) organizations that receive contributions from limited sources. Due

to fear of abuse, they are subject to stricter regulation than other § 501(c)(3)

organizations.

161

See id. at 546. The Court noted the organization had the option to set up a separate § 501(c)(4) organization that

could engage in the lobbying activities.

162

Id. at 545-46 (internal citations omitted).

163

See Minneapolis Star & Tribune Co. v. Minn. Comm’r of Revenue, 460 U.S. 575, 582 (1983) (“A tax that burdens

rights protected by the First Amendment cannot stand unless the burden is necessary to achieve an overriding

governmental interest.”).

164

The decision by Congress to not exclude campaign expenditures from a generally applicable tax might be supported

by the non-subsidization rationale expressed in Cammarano.

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•

IRC § 6033 imposes a proxy tax on tax-exempt organizations that fail or choose

not to notify their members of the non-deductible portion of dues used for

political purposes.

•

IRC §§ 4911 and 4912 impose a tax on § 501(c)(3) organizations that have

lobbying expenditures exceeding certain limits.

It could be argued that the § 527(f) tax and § 6033 proxy tax are similar to a corporate campaign

expenditure tax in that all three would tax the political expenditures of entities which are

otherwise permitted to engage in the activities. The other taxes might be characterized as penalty

taxes, and thus could support an argument that an excise tax would be permissible even if it had

some penalizing features. However, as discussed below, there are characteristics of the existing

taxes that might undermine an attempt to draw support from them for an excise tax on corporate

campaign expenditures.

It could be argued that the § 527(f) tax and § 6033 proxy tax could be upheld, in at least some

contexts, under the non-subsidization rationale expressed in Cammarano. While they may look

like taxes imposed on entities engaging in protected speech, it might be more appropriate in

certain situations to characterize them as the mechanism to avoid federal subsidization of political

activities. 165 This is because the effect of both is that the organizations are not exempt from

federal income tax on otherwise exempt income to the extent funds are used for certain political

activities. Thus, the two taxes are arguably the functional equivalents of a disallowed deduction

under § 162(e), although this comparison might not support the taxes in all circumstances. Such

an argument would not appear to apply to the proposal to tax corporate campaign expenditures.

The taxes imposed under §§ 4955, 4945, 4911, and 4912 could be characterized as penalty taxes

on § 501(c)(3) organizations for engaging in campaign and lobbying speech, thus suggesting that

the subsidization rationale cannot fully justify their imposition. The taxes imposed under §§ 4955,

4911, and 4912 are imposed on activities that § 501(c)(3) organizations are restricted under the

tax laws from engaging in. Assuming these limitations are constitutional, the taxes may be an

appropriate mechanism for enforcing them. If the limitations were found to be unconstitutional,

then that might call into question the constitutionality of the taxes as well. The § 4945 tax is

different in that it also applies to certain expenditures that are otherwise permitted under the tax

laws. Thus, to the extent the § 4945 tax is imposed on such activities, it might be characterized as

penalizing behavior that is otherwise lawful, and therefore might be compared to a proposal to tax

corporate campaign expenditures. However, the two circumstances might be distinguished.

Private foundations are heavily regulated due to fear of abuse, and thus the § 4945 tax could be

seen as a part of an overall regulatory scheme, separate from campaign finance. Whether a

comparable rationale would exist for a proposal to tax corporate campaign expenditures would

appear to depend on the specific proposal and its context.

Finally, one could point to the fact that the existing taxes apply to tax-exempt organizations, thus

perhaps permitting the argument that any burden on their speech could be avoided by

165

See, e.g., American Soc’y of Ass’n Execs. v. Bentsen, 848 F. Supp. 245, 249 (D. D.C. 1994) (upholding the § 6033

proxy tax regime, explaining that “[u]pon close examination of this case it becomes obvious that this is less an instance

of penalizing the exercise of a fundamental right than a case of Congress deciding not to subsidize the exercise of that

right. The United States is not obligated to subsidize any person’s lobbying.”).

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

restructuring their activities. 166 It seems difficult to fully extend a similar rationale to a tax on

corporate campaign expenditures.

Public Financing For Congressional Campaigns167

Proposals to enact public financing for congressional candidate campaigns have been introduced

in the 111th Congress.168 Public financing programs are generally voluntary and traditionally offer

grants or matching funds in exchange for candidates agreeing to limit spending. It appears that

legislation establishing such public financing programs, requiring compliance with spending

limits, would pass constitutional muster on the condition that they are voluntary.

In the 1976 landmark case of Buckley v. Valeo,169 the Supreme Court held that spending

limitations violate the First Amendment because they impose direct, substantial restraints on the

quantity of political speech. The Court found that expenditure limitations fail to serve any

substantial government interest in stemming the reality of corruption or the appearance thereof,

and that they heavily burden political expression.170 Reaffirming Buckley, in Citizens United v.

FEC, the Court reiterated this determination finding that truly independent expenditures, with no

prearrangement and coordination with a candidate, not only lessen the value of the expenditure to

the candidate, but also mitigate any danger that expenditures will be made as a quid pro quo for

improper commitments from the candidate.171 As a result, spending limits may only be imposed if

they are voluntary.

In Buckley, the Supreme Court upheld the constitutionality of the voluntary public financing

program for presidential elections.172 The Court concluded that presidential public financing was

within the constitutional powers of Congress to reform the electoral process, and that public

financing provisions did not violate any First Amendment rights by abridging, restricting, or

censoring speech, expression, and association, but rather encouraged public discussion and

participation in the electoral process. According to the Court:

Congress may engage in public financing of election campaigns and may condition

acceptance of public funds on an agreement by the candidate to abide by specified

expenditure limitations. Just as a candidate may voluntarily limit the size of the contributions

he chooses to accept, he may decide to forgo private fundraising and accept public

funding.173

166

See, e.g., American Soc’y of Ass’n Execs. v. United States, 195 F.3d 47, 50 (D.C. Cir. 1999) (upholding the § 6033

proxy tax regime, finding that “[a] § 501(c)(6) association can avoid any alleged burden on its First Amendment rights

by splitting itself into two § 501(c)(6) organizations—one that engages exclusively in lobbying on behalf of its

members and one that completely refrains from lobbying.”).

167

This portion of the report discussing public financing was written by (name redacted).

168

For further discussion of public financing, see CRS Report RL33814, Public Financing of Congressional

Campaigns: Overview and Analysis, by (name redacted).

169

424 U.S. 1 (1976).

170

Id. at 55.

171

Citizens United, slip op. at 41 (quoting Buckley at 47).

172

For further discussion of presidential public financing, see CRS Report RL34534, Public Financing of Presidential

Campaigns: Overview and Analysis, by (name redacted).

173

Buckley, 424 U.S. at 57 n. 55.

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Although public financing proposals contain an incentive for compliance with spending limits—

the receipt of public monies or other benefits—it does not appear that such incentives jeopardize

the voluntary nature of the spending limitation. That is, a candidate could legally choose not to

comply with the spending limits by opting not to accept the public benefits. Therefore, it appears

that a proposal establishing a voluntary public finance program for congressional candidates,

requiring compliance with spending limits, would likely be upheld as constitutional.

Constitutional Amendment174

In Citizens United v. FEC, the Supreme Court invalidated two provisions of the Federal Election

Campaign Act (FECA), codified at 2 U.S.C. § 441b, finding that they were unconstitutional under

the First Amendment. It struck down the long-standing prohibition on corporations using their

general treasury funds to make independent expenditures, 175 and Section 203 of the Bipartisan

Campaign Reform Act of 2002 (BCRA), which amended FECA, prohibiting corporations from

using their general treasury funds for “electioneering communications.”176 BCRA defines

“electioneering communication” as any broadcast, cable, or satellite communication that refers to

a clearly identified federal candidate made within 60 days of a general election or 30 days of a

primary.177 The Court determined that these prohibitions constitute a “ban on speech” in violation

of the First Amendment.178

As a result of the Court’s decision being one of constitutional interpretation—not statutory

interpretation—amending the Constitution is an option for overturning the ruling directly. In

order to restore FECA provisions that were in effect prior to the Court’s ruling, it appears that a

proposal to amend the Constitution would need to allow, at a minimum, enactment of legislation

that prohibits corporations and labor unions from using their general treasury funds to make

expenditures for communications that expressly advocate election or defeat of a clearly identified

federal candidate and for electioneering communications.

In the 111th Congress, proposals have been introduced that would amend the Constitution. In

accordance with Article V of the Constitution, such joint resolutions would require approval by

two-thirds of each House, would become effective upon ratification by the legislatures of threefourths of the states, and specify that approval is required within seven years from the date of

submission. 179

174

This portion of the report discussing a constitutional amendment was written by (name redacted).

Citizens United, slip op. at 20-51.

176

See id.

177

2 U.S.C. § 434(f)(3).

178

Citizens United, slip op. at 22.

179

U.S. CONST. art. V (“The Congress, whenever two thirds of both Houses shall deem it necessary, shall propose

Amendments to this Constitution, or, on the Application of the Legislatures of two thirds of the several States, shall call

a Convention for proposing Amendments, which, in either Case, shall be valid to all Intents and Purposes, as Part of

this Constitution, when ratified by the Legislatures of three fourths of the several States, or by Conventions in three

fourths thereof, as the one or the other Mode of Ratification may be proposed by the Congress…”) It has been accepted

that Congress may, in proposing an amendment, set a reasonable time limit for its ratification. Beginning with the

Eighteenth Amendment, save for the Nineteenth, Congress has included language in all proposals stating that the

amendment should be inoperative unless ratified within seven years. Specifically, seven-year periods were included in

the texts of the proposals of the 18th, 20th, 21st, and 22nd Amendments. In proposing the 23rd Amendment, it appears that

Congress concluded that including a time limit in the text merely cluttered up the amendment, and therefore in it, and in

(continued...)

175

Congressional Research Service

Legislative Options After Citizens United v. FEC: Constitutional and Legal Issues

Proposals to amend the Constitution vary. Some would provide Congress with the expansive

power to regulate the raising and spending of money in federal elections, including setting limits

on expenditures made in support of or opposition to federal candidates.180 Such an amendment to

the Constitution would not only appear to allow Congress to enact legislation restricting corporate

and labor union expenditures, but also limiting independent expenditures by candidates, political

parties, political action committees (PACs), and individuals. In contrast, other proposals take a

more direct approach and would expressly prohibit corporations and labor unions from using

general treasury funds for advertisements in connection with a federal office campaign, regardless

of whether the advertisement expressly advocates the election or defeat of a clearly identified

federal candidate. 181 In addition, as Citizens United appears to invalidate state laws that restrict

corporate expenditures—in addition to the federal statute—some proposals to amend the

Constitution would also provide states with the power to enact laws regulating corporate

expenditures in connection with state elections.182

Author Contact Information

(name redacted)

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

(name redacted)

Legislative Attorney

[redacted]@crs.loc.g

ov, 7-....

(name redacted)

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

(name redacted)

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

(name redacted)

Legislative Attorney

[redacted]@crs.loc.gov, 7-....

(...continued)

subsequent amendments, included the time limits in the authorizing resolution. Following the extension debate

regarding the Equal Rights proposal, Congress once again inserted into the text of the amendment the time limit with

respect to the proposal of voting representation in Congress for the District of Columbia. See Congressional Research

Service, THE CONSTITUTION OF THE UNITED STATES OF AMERICA ANALYSIS AND INTERPRETATION 943 n. 26,

http://www.crs.gov/conan/default.aspx?mode=topic&doc=Article05.xml&t=1|2|3

180

See, e.g., S.J.Res. 28 (111th Cong.).

181

See, e.g., H.J.Res. 68 (111th Cong.).

182

See, e.g,, H.J.Res. 13 (111th Cong.); H.J.Res. 74 (111th Cong.).

Congressional Research Service

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