Monday, March 11, 2013

A Refresher on Standing in Tax (Exemption) Cases

A couple of weeks ago, Johnny Buckles reported on the court case brought by Citizens for Responsibility and Ethics in Washington and David Gill against the IRS for what they believe is lax enforcement by the IRS of exempt status for 501(c)(4) organizations.  Johnny's post is here, and we've blogged so many times on (c)(4)'s generally that I won't even attempt a list (the search engine is your friend).

But the number of calls I've gotten from reporters who are taking this case seriously indicates that perhaps a short refresher on standing to sue in tax cases would be helpful (if nothing else, then I'll at least be able to refer reporters here!).  So here goes.

As all lawyers know, the general concept of standing to sue is a predicate to successfully bringing litigation.  In general, standing doctrine requires that the plaintiff in a case be able to allege "an injury in fact" - that is, that the defendant's conduct created a direct personal harm to the plaintiff.  The key here is the word "direct": individuals cannot generally sue the government because of some general grievance about government operations.  In tax cases, what this means is that one generally cannot sue taxing authorities over their treatment of some other taxpayer, even if one might argue that that treatment resulted in some diffuse injury to the plaintiff. I generally cannot complain that the IRS is treating someone else better than they should be, even if that better treatment arguably impacts me (e.g., I pay more in taxes) in some diffuse way.  Another way to look at this is that I cannot prove that my taxes would be impacted in any direct way by the treatment of another taxpayer.  My taxes aren't necessarily going to go down if the IRS "gets tough" with someone else; nor will they necessarily go up if the IRS lets someone else slide.  About as good a discussion of the general rules of taxpayer standing that I've read is in Kristen Hickman, How Did We Get Here Anyway?: Considering the Standing Question in DaimlerChrysler v. Cuno, 4 Georgetown Journal of Law & Public Policy 47 (2006).

One of the more famous cases dealing with standing in tax matters also happens to be a federal tax exemption case.  In Abortion Rights Mobilization v. U.S. Conference of Catholic Bishops, 885 F.2d 1020 (2d Cir. 1989), the court held that Abortion Rights Mobilization did not have standing to sue the IRS over its alleged non-enforcement of the political campaign activity limitation in Section 501(c)(3).  While the court did not rule out the possibility that taxpayers might have standing to challenge certain very narrow aspects of tax administration, it distinguished the Supreme Court's 1988 decision in Bowen v. Kendrick, 487 U.S. 589, where the court had permitted a taxpayer to challenge the grant of funds under the Adolescent Family Life Act as violating the Constitution: "Here, there is no nexus between plaintiffs' allegations and Congress' exercise of its taxing and spending power."

More recently, the Supreme Court in DaimlerChrysler Corp. v. Cuno, 547 U.S. 332 (2006) held that individual taxpayers did not have standing in federal court to challenge tax exemptions and other tax breaks given by the city of Toledo to DiamlerChrysler in order to entice them to locate a plant there. The Court reaffirmed the general federal taxpayer standing doctrine in Cuno, and applied the same concepts to the state taxpayers at issue in the case.

The addition by CREW of David Gill to the case likely is CREW's attempt to avoid the taxpayer standing doctrine.  Gill will argue that he personally suffered as a result of the IRS's lack of enforcement, because that lack of enforcement led to large campaign spending attacking his candidacy.  But CREW and Gill are going to have a very hard time showing that the campaign spending wouldn't have happend anyway; moreover, the Second Circuit in the Abortion Rights Mobilization case addressed the issue of "competitor" standing in a way that is going to be difficult for Gill to overcome: in rejecting "competitor" standing, the Second Circuit noted that Abortion Rights Mobilization had failed to undertake the same political activity as the Catholic Church and therefore in effect had refused to become a competitor.  Similarly, Gill could have formed his own 501(c)(4) organization to compete in his political campaign, but did not.  Gill isn't arguing that the IRS audited his own (c)(4) and found it wanting in circumstances where a competitor was let go (a set of facts that might provide standing for Gill).

As I've told all the reporters, I expect this case to be dismissed on standing grounds (if someone raises the issue; I assume they will).   We will see.

JDC

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