PAC particulars.

While it is perfectly legal and legitimate for trade associations that are tax-exempt under Section 501(c)(6) of the Internal Revenue Code to have political action committees, the laws governing PACs are quite detailed, and the penalties for failure to comply can be expensive and embarrassing. (Because 501(c)(3) organizations, including religious, charitable, and educational organizations, may not engage in political activity, most experts on the law have concluded that these organizations cannot sponsor PACs.)

PACs are regulated by the Federal Election Campaign Act of 1971. The act is administered and enforced by the Federal Election Commission (FEC), which consists of six members -- normally three Republicans and three Democrats. Given this structure, the commission can and does deadlock.

PACs that contribute to candidates for state office or that support or oppose state ballot questions are also subject to state election laws. Such PACS should have separate federal and state bank accounts or be separately organized.

Requirements for treasurer and reports. Every PAC must have a treasurer; no contribution or payout can be accepted or made if the office of treasurer is vacant. The treasurer or his or her designated agent must approve all PAC expenditures. The treasurer must file and sign reports of receipts and disbursements. These include

* quarterly reports in an election year, semiannual in off-years;

* pre-election reports; and

* post-general-election reports.

Each report must disclose the identity of each person who contributes $200 or more to the PAC within the calendar year. These reports are filed both with the FEC and with the states -- in the case of contributions for presidential and vice presidential candidates, every state in which the PAC makes an expenditure; in the case of Senate and House candidates, in the candidate's state.

Reports open to the public. The FEC must make all reports and statements available for public inspection and copying within 48 hours after filing. However, information copied from the reports or statements cannot be sold or used for soliciting contributions or for other commercial purposes.

To enforce this restriction, PACs are allowed to submit 10 fake names on each report filed. Mail addressed to these names will come back to the PAC so that it can determine whether someone is using the information for prohibited purposes.

Limits on contributions. Contributions by any person to a multi-candidate PAC (a PAC that has made contributions to at least five candidates in a six-month period) are limited to $5,000 per person, per election. No person may contribute more than $25,000 per year to all PACs. A multicandidate PAC is limited to contributions of $5,000 per candidate, per election.

Limits on solicitations. An important restriction is that an association-sponsored PAC may not solicit contributions from anyone other than its members, their families, and its executive or administrative personnel and their families. A great deal of controversy surrounds the FEC's definition of member. Under the definition, a person or organization must

* possess a significant financial attachment to the association that goes beyond the mere payment of dues;

* pay dues on a regular basis and vote directly for a member of the governing board or for a representative who votes to select a member of the governing board; or

* be entitled to vote for the entire governing board.

The practical import is that associations with categories of members that do not vote may not consider those people or organizations to be members under the FEC definition. Associations, therefore, may not solicit these people or organizations for contributions to PACs. As a result, a number of associations have amended their by laws either to allow voting by all members or to allow representatives of nonvoting members to sit on the board.

A trade association PAC with corporate members may also solicit contributions from

* the stockholders and executive or administrative personnel of the association's member corporations and

* the families of stockholders or personnel.

To do so, the association PAC must first obtain the permission of the member corporation to solicit its stockholders, executives, and administrators and their families. The member corporation may only approve solicitation by one association each year.

The latter restriction is, by far, the more burdensome. For example, if the ABC company belongs both to the American Chamber of Commerce and the National Chamber of Commerce, the company may authorize he PAC of only one of those associations to solicit its people. With many companies belonging to a host of associations, competition can be stiff.

Tax treatment. Under the Internal Revenue Code, PACS (as "political organizations") may exclude the contributions received, including profits from fund-raising events, from gross income to the extent that these amounts are used for exempt functions. Exempt functions are defined as "influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any federal, state, or local public office." Thus, a PAC can hold an event at a trade association meeting, convention, or annual exhibition, and the income will not be taxable, so long as it is used for an exempt function. Obviously, contributing PAC money to a candidate or a political party would be an exempt function.

Conversely, any direct expenditure made by a trade association for an exempt function -- for example, when an association writes a check in its own name to a candidate -- is taxed on the lesser of the amount spent or its net investment income, at the maximum corporate rate (currently 35 percent). This rule does not apply to the administrative expenses of the PAC, which the association may pay without violating the law.

For more information

about PACs

The FEC publishes booklets explaining the Federal Election Campaign Act, how to comply, and how to file reports. To obtain these booklets, write to the FEC at 999 E Street, N.W., Washington, DC 20463; or call the FEC's fan service at [phone], and request document number 411 to receive a menu of available documents.

George D. Webster is general counsel to ASAE and a partner in Webster, Chamberlain & Bean. This Washington, D.C., law firm is counsel to more than 200 nonprofit organizations.