The election year may be over, but free speech issues affecting politics and nonprofits remain of prime importance. The case of Freedom Path, Inc. v. Lois Lerner, et al. presents the question of whether the IRS’s “facts and circumstances” test for tax-exempt organizations’ advocacy speech is constitutional. The case could impact both free speech legal principles and the IRS’s future handling of nonprofits’ tax-exempt qualifications and activities.
Freedom Path is a Section 501(c)(4) social welfare organization that engages in “issue advocacy” – that is, communications intended to educate people about a wide variety of public policy issues. Some section 501(c)(3) organizations also engage in issue advocacy activities, addressing public policy issues as part of their mission. For both types of tax-exempt organizations, questions of legal permissibility may arise when these communications take on a political hue.
For Section 501(c)(3) organizations, an absolute bar exists against political campaign activity and only limited lobbying is allowed. Section 501(c)(4) organizations may engage only limited political campaign activity. Questions related to politically related communications may arise both when an organization initially applies for tax-exempt recognition (and on an ongoing basis regarding continued qualification for tax-exempt status.
Freedom Path began its legal journey in 2011, when it applied to the IRS for tax-exempt recognition under 501(c)(4). After two and a half years, Freedom Path learned that the IRS had rejected its application on the grounds that its advocacy speech was too political under the IRS’s facts and circumstances test. Freedom Path sued the IRS and its officials in April 2014, in Texas federal district court. (See our law firm’s blog posted on May 9, 2014, for more background information.)
Freedom Path’s Constitutional Challenge
Freedom Path’s motion for summary judgment is now pending before a Texas federal court. Freedom Path’s arguments focus on three First Amendment objections:
- The IRS’s multi-factor test is too vague under applicable constitutional standards;
- The IRS test improperly calls for subjective evaluation of an organization’s communications; and
- The IRS test impermissibly burdens free speech through its chilling effect and allowance for illegal viewpoint discrimination.
According to Freedom Path, the IRS test essentially amounts to “we know it when we see it,” with no single factor predominating and the entire analysis depending on a case-by-case approach. Exempt organizations must guess at whether the activity is political campaign activity or issue advocacy. Freedom Path further observes, “even the IRS has publicly acknowledged that the ‘facts and circumstances’ test is ambiguous and confusing.” (See our law firm’s blog posted May 30, 2014 for more information about the proposed regulations.)
In making these arguments, Freedom Path relies heavily on the U.S. Supreme Court’s landmark cases of FEC v. Wisconsin Right to Life (2007) and Citizens United v. FEC (2010), contending that they dramatically altered the constitutional landscape for the permissibility of such amorphous tests. In Wisconsin Right to Life, the Court rejected an “open-ended rough-and tumble of factors, which invit[es] complex argument.” Instead, the Court directed that an objective constitutional test should be used to determine whether a communication constitutes issue advocacy or political campaign activity, based on whether “no reasonable interpretation could be made” other than as an appeal to vote for or against a specific candidate. As the Court expressed, “Where the First Amendment is implicated, the tie goes to the speaker, not the censor.”
The IRS Response
Not surprisingly, the IRS disagrees with Freedom Path’s arguments. In its response brief, the IRS asserts that its multi-factor test is indeed clear and objective enough that (a) persons have fair notice of the legal limits for issue advocacy communications, and (b) it is not susceptible to IRS abuse. In doing so, the IRS claims the following constitutionally significant distinctions.
First, the IRS notes that Wisconsin Right to Life involved criminal sanctions, whereby persons engaging impermissibly in electioneering activities could be held criminally liable. The IRS thus contends that such free speech analysis is inapplicable here, and therefore a less specific test is acceptable.
Second, the IRS claims that its test does not prohibit any speech; rather “it merely aids in determining whether a tax might be owed for activity that Congress has chosen not to subsidize [through Section 501(c) of the Code].” Since there is “prior restraint” (i.e., forbidden speech), but rather only a “possible tax implication,” the potential for chilling speech is “markedly less severe.”
The IRS further argues that in any event, the numerous factors in its test are sufficiently clear, discrete, and objective. According to the IRS, these factors do not invite arbitrary or discriminatory application, and Freedom Path’s assertions of actual or potential IRS viewpoint discrimination are unfounded. Indeed, if Freedom Path encounters a problem with the IRS, its solution is to seek administrative and judicial review.
Why the IRS Test Fails to Pass Constitutional Muster
As Freedom Path argues, the IRS’s facts and circumstances test conflicts with the Court’s requirement of a more clear, objective test that is not context-specific. As set forth in IRS Revenue Ruling 2004-06, this test first calls for evaluation of the following six factors, to determine whether a communication is permissible issue advocacy or political campaign activity:
a) The communication identifies a candidate for public office;
b) The timing of the communication coincides with an electoral campaign;
c) The communication targets voters in a particular election;
d) The communication identifies that candidate’s position on the public policy issue that is the subject of the communication;
e) The position of the candidate on the public policy issue has been raised as distinguishing the candidate from others in the campaign, either in the communication itself or in other public communications; and
f) The communication is not part of an ongoing series of substantially similar advocacy communications by the organization on the same issue.
The IRS test then adds the following additional five factors into the evaluation:
a) The absence of any one or more of the factors listed in a) through f) above;
b) The communication identifies specific legislation, or a specific event outside the control of the organization, that the organization hopes to influence;
c) The timing of the communication coincides with a specific event outside the control of the organization that the organization hopes to influence, such as a legislative vote or other major legislative action (for example, a hearing before a legislative committee on the issue that is the subject of the communication);
d) The communication identifies the candidate solely as a government official who is in a position to act on the public policy issue in connection with the specific event (such as a legislator who is eligible to vote on the legislation); and
e) The communication identifies the candidate solely in the list of key or principal sponsors of the legislation that is the subject of the communication.
A subsequent IRS ruling (Rev. Rul. 2007-41) provides a list of 21 scenarios with an accompanying analysis of whether the communications constitute political campaign activity or permissible issue advocacy.
As Freedom Path argues, the above multi-factor test and its related scenarios are so highly subjective that the test violates the constitutional void-for-vagueness doctrine, which requires that ordinary persons receive fair notice about the prohibition. Further, the IRS test impermissibly invites discriminatory IRS enforcement, as reflected in both the IRS’s “Be on the Lookout” (“BOLO”) scandal involving delayed tax-exempt applications and its evident viewpoint discrimination in the Z Street litigation. (See our law firm’s blog posted May 9, 2015 for more information about a federal court’s verbal thrashing of the IRS in the Z Street case.)
The IRS test is otherwise too contextual, such as by invoking timing considerations, considering whether communications are part of a series, and focusing on other event-related aspects. These infirmities result in a constitutionally unacceptable “chilling effect,” whereby speakers are inhibited from speaking – for fear of tax-exempt loss or other adverse legal consequences. The better, constitutionally acceptable course is to strike down the IRS test as unconstitutional and instead use the Wisconsin Right to Life’s far more objective approach.
A Path Forward: Protecting First Amendment Rights
Freedom Path’s arguments are consistent with First Amendment constitutional requirements and our country’s free speech values. The U.S. Supreme Court has steadfastly affirmed the value of politically related speech to our democratic system – regardless of whether the context is criminal or civil, and particularly for Section 501(c)(3) and 501(c)(4) organizations.
As the Court observed in its 1976 Buckley v. Valeo ruling, “Freedom of speech plays a fundamental role in a democracy; freedom of thought and speech ‘is the matrix, the indispensable condition, of nearly every form of freedom.’” As further recognized by the Court in Citizens United, the First Amendment prohibits the government from unduly interfering in the “marketplace of ideas,” particularly since “[s]peech is an essential mechanism of democracy, for it is the means to hold officials accountable to the people.” Indeed, as the Court ruled in Wisconsin Right to Life, any test regarding politically oriented speech thus should “reflect our profound national commitment to the principle that debate on public issues should be uninhibited, robust, and wide-open.” The government therefore must satisfy the high-level “strict scrutiny” constitutional test and show that its speech regulation furthers a “compelling government interest” and is “narrowly tailored to achieve that interest.”
Given the Court’s clear guidance on primacy of organizations’ free speech rights, the IRS should “curtail speech only to the degree necessary to meet the particular problem at hand, and must avoid infringing on the speech that does not pose the danger that has prompted regulations” (See FEC v. Massachusetts Right to Life (1937)). Intent-based, subjective tests based on factors like timing and relevancy of issues, as in Freedom Path, do not pass constitutional muster.
Finally, the IRS is not well equipped to protect such critically important free speech rights. Remember that the IRS’s primary function is to operate as a revenue collection agency, not an arbiter of constitutional rights. The IRS has limited resources to evaluate issues of constitutional magnitude affecting tax-exempt organizations. From this structural standpoint, it is problematic to allow the IRS discretionary power to engage in content-based scrutiny, as per its current practice. (See also S. Wagenmaker, “Speak Up: Issue Advocacy in Increasingly Politicized Times, 7 Pepperdine J. Bus. Entrepreneurship & L. 285 (2014, available at http://digitalcommons.pepperdine.edu/jbel/vol7/iss2/1/.)
What next? Freedom Path’s and the IRS’s briefs are now pending before the federal trial court in Texas. Should Freedom Path prevail on its constitutional grounds, a different (and constitutionally correct) path is likely ahead for the IRS and its treatment of tax-exempt organizations’ issue advocacy communications.