Saturday, November 29, 2014
Update on Nonprofits & Politics: Aprill and Colinvaux Articles, AALS Program, IRS Controversy Developments & More
While perhaps the congressional attention to the now 18 months old and counting IRS controversy will decline as the focus shifts to governing (we hope) and 2016 (unavoidably), the bubbling pot that is now nonprofits and politics continues to boil. Here are some of the latest developments:
Ellen Aprill (Loyola-L.A.) has posted The Latest Installment of the Section 501(c)(4) Saga: The Section 527 Obstacle to Effective Section 501(c)(4) Regulations, and Roger Colinvaux (Catholic) has posted Political Activity Limits and Tax Exemption: A Gordian's Knot, Virginia Tax Review (forthcoming). (And, as noted by Paul Caron when I presented at Loyola-L.A., I am working on a draft article currently titled Taxing Politics, which I should hopefully be able to post early in the new year.)
At the 2015 AALS Annual Meeting, the Section on Nonprofit and Philanthropy Law and the Section on Taxation are co-sponsoring IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable? on Saturday, January 3rd, from 10:30 a.m. to 12:15 p.m. The topic grew out of the IRS controversy, although the panel's scope will be much broader. Marcus Owens (Caplin & Drysdale) will be moderating, and panelists include Ellen Aprill (Loyola-LA), Phil Hackney (LSU), Jim Fishman (Pace), Terri Helge (Texas A&M), Dan Tokaji (Ohio State), and Donald Tobin (Maryland).
In news relating directly to the IRS controversy, the staffs of the Senate Permanent Subcommittee on Investigations issued dueling reports, neither of which said much more than we have already heard (repeatedly) from both sides of the aisle. At the IRS, new TE/GE Commissioner Sunita Lough issued her annual Program Letter, emphasizing accountability and transparency as she continues to try to move the division beyond the controversy (referenced obliquely as "the challenges over the last year for the IRS and TE/GE specifically"). And to the annoyance of her critics, Lois Lerner gave an extensive interview to Politico.
And there is more:
- Pulpit Freedom Sunday 2014 launched on October 5th, to very limited media coverage, although there were a few stories right around election day about the over 1600 participating pastors and churches. See the stories in Politico, a Washington Post blog, and the Washington Times.
- On the election law/FEC side of things, there are lawsuits still pending that asset Crossroads GPS (Public Citzen v. FEC) and American Action Network and Americans for Job Security (CREW v. FEC) should have registered and reported as political commitees. (Hat tip: Paul Barton's article this past week in the BNA Daily Tax Report)
Monday, November 24, 2014
Earlier this month the U.S. Court of Appeals for the Seventh Circuit issued an opinion in Freedom from Religion Foundation v. Lew, the Foundation's constitutional challenge to the ministerial housing allowance exclusion from gross income provided by Internal Revenue Code section 107. A lower court had struck down the allowance, but the appellate court concluded the foundation and its two co-presidents lacked standing to pursue the challenge. In doing so, however, the court may have provided a road map for a future challenge to this provision.
The appellate court based its conclusion that the plaintiffs lacked standing on the simple fact that they had never been denied the allowance because they had never applied for it. While the plaintiffs argued it was enough that they were similarly situated to ministers who enjoyed this tax benefit except for the fact that they are not "ministers of the gospel" as that term is used in section 107 and also that applying for the benefit would be futile, the appellate court disagreed that these allegations were enough to demonstrate the particularized injury required for standing purposes. The solution of course is obvious - the plaintiffs should now seek to claim the exclusion provided by section 107. But the government's response is equally obvious, if the government does not want to litigate this case - choose not challenge their claim. The latter tactic could, however, open the door for all section 501(c)(3) nonprofits to seek to provide tax-free housing for their senior staff, a situation that likely the IRS (and Congress) would not tolerate if done a large scale. So the ministerial housing allowance challenge is likely only delayed, not eliminated, at least based on the Seventh Circuit's standing reasoning.
Monday, November 17, 2014
In an Associated Press story, the Tulsa World reports that the United States Court of Appeals for the District of Columbia Circuit has rejected a challenge by religious groups, including Priests For Life and the Roman Catholic Archbishop of Washington, to an accommodation devised by the Obama administration to enable the groups to avoid paying for contraception under the Affordable Care Act. The court concluded that the accommodation does not impose an unjustified substantial burden on religious exercise in violation of the Religious Freedom Restoration Act (“RFRA”).
The facts are likely familiar to most readers, and are summarized in the story as follows:
The Affordable Care Act requires that women covered by group health plans be able to acquire Food and Drug Administration-approved contraceptive methods at no additional cost. In response to an outcry from religious groups, the government devised the accommodation, but the groups continued to oppose the regulations.
To be eligible for the accommodation, a religious organization must certify to its insurance company that it opposes coverage for contraceptives and that it operates as a nonprofit religious organization.
The opinion succinctly captures the plaintiffs’ objection to the accommodation:
The contraceptive coverage opt-out mechanism substantially burdens Plaintiffs’ religious exercise, Plaintiffs contend, by failing to extricate them from providing, paying for, or facilitating access to contraception. In particular, they assert that the notice they submit in requesting accommodation is a “trigger” that activates substitute coverage, and that the government will “hijack” their health plans and use them as “conduits” for providing contraceptive coverage to their employees and students. Plaintiffs dispute that the government has any compelling interest in obliging them to give notice of their wish to take advantage of the accommodation. And they argue that the government has failed to show that the notice requirement is the least restrictive means of serving any such interest.
The court rejected the plaintiffs’ RFRA claim. Said the court:
We conclude that the challenged regulations do not impose a substantial burden on Plaintiffs’ religious exercise under RFRA. All plaintiffs must do to opt out is express what they believe and seek what they want via a letter or two-page form. That bit of paperwork is more straightforward and minimal than many that are staples of nonprofit organizations’ compliance with law in the modern administrative state. Religious nonprofits that opt out are excused from playing any role in the provision of contraceptive services, and they remain free to condemn contraception in the clearest terms. The ACA shifts to health insurers and administrators the obligation to pay for and provide contraceptive coverage for insured persons who would otherwise lose it as a result of the religious accommodation.
The court further concluded that, even if the law were deemed to substantially burden the plaintiffs’ exercise of religion, the regulation is supported by compelling governmental interests, and the accommodation “requires as little as it can from the objectors” while still serving those interests.
In the AP story, the Archdiocese of Washington is quoted as characterizing the decision as "very troubling and deeply flawed."
Monday, September 22, 2014
Puzzler: Respecting and Valuing an Interest in a Disregarded SMLLC for Charitable Deduction Purposes?
I thank Professor Cassady Brewer of Georgia State University College of Law for bringing this interesting case to our attention. Please read on...
In RERI Holdings I, LLC v. Comm’r, 143 T.C. No. 3 (2014), the Tax Court determined that a disregarded, single-member LLC interest should not be ignored for purposes of determining whether a taxpayer is entitled to a charitable contribution deduction. This decision has not received much attention, but it potentially has significant implications for charities and donors.
The taxpayer in RERI Holdings I, LLC contributed an interest in a disregarded SMLLC holding real property to the University of Michigan. The taxpayer claimed a charitable deduction of approximately $33 million in connection with the donation of the SMLLC interest. As required for tax purposes, the taxpayer obtained an appraisal substantiating the amount of its claimed deduction; however, the taxpayer’s appraisal was of the underlying real property held by the disregarded SMLLC, not the membership interest in the SMLLC itself. Because the interest in the SMLLC, not the underlying real property, was donated to the University of Michigan, the IRS argued in a motion for summary judgment that the taxpayer’s charitable deduction should be disallowed. In particular, the IRS argued that the deduction must be disallowed because the appraisal was of the wrong property and therefore failed the “qualified appraisal” requirements for charitable contributions of property.
Without much fanfare, Judge Halpern accepted the argument of the IRS that a charitable contribution of an interest in a disregarded SMLLC should be viewed differently than a charitable contribution of the underlying asset. Judge Halpern so held notwithstanding the fact that the SMLLC is otherwise ignored for federal income tax purposes. Judge Halpern’s opinion relies heavily on the Tax Court’s earlier decision in Pierre v. Comm’r, 133 T.C. 24 (2009), supplemented by 99 T.C.M. (CCH) 1436 (2010), that, for gift tax valuation purposes, a taxpayer’s gifts of membership interests in the taxpayer’s SMLLC are distinct from gifts of partial interests in the underlying property. Pierre arguably is distinguishable, though, from RERI Holdings I, LLC, because (i) Pierre is a gift (not income) tax case and (ii) the gifts in Pierre transformed the SMLLC into a multi-member LLC held by four trusts. This latter point of distinction, though, may not be significant as it appears the trusts were grantor trusts such that the taxpayer in Pierre remained the income tax owner of the SMLLC.
Despite the fact, however, that Judge Halpern agreed with the IRS’s view that an interest in a disregarded SMLLC should be respected for charitable contribution deduction purposes, all was not lost for the taxpayer in RERI Holdings I, LLC. Rather, perhaps to avoid so-easily granting summary judgment against the taxpayer and in favor of the IRS, Judge Halpern reasoned that there was an unresolved issue of material fact whether a valuation of the property held by the SMLLC rather than a valuation of the SMLLC interest itself nevertheless could “stand proxy” for the otherwise required qualified appraisal. The ultimate outcome of the case, therefore, remains to be seen.
The lesson for charities and donors: RERI Holdings I, LLC creates uncertainty with regard to the proper treatment of disregarded SMLLC interests for both charitable deduction and substantiation requirements. Given that uncertainty, donors to charitable organizations should transfer the underlying property itself to charity rather than transferring an interest in an SMLLC holding the property. If the property must be wrapped inside a disregarded LLC for liability protection or other reasons, then the donee charity should form the disregarded SMLLC to receive the contribution rather than receiving an interest in the property-holding SMLLC formed by the donor. Otherwise, due to the quirky way in which SMLLC membership interests apparently are valued for federal tax purposes, the donor inadvertently may be reducing the amount of his or her expected charitable contribution deduction. On the other hand, for estate and gift tax purposes, a donor presumably would rather transfer a membership interest in a disregarded SMLLC to a non-charitable donee in order to minimize the value of the transfer and thereby reducing potential estate and gift taxes.
My thanks again to Professor Brewer.
Tuesday, August 19, 2014
The Washington Post reports that D.C. Superior Court Judge Robert Okun has approved the proposal of the Trustees of the Corcoran Gallery of Art to transfer its college to George Washington University and the bulk of its art collection to the National Gallery of Art. The Corcoran Gallery is reported to be the oldest private art museum in the nation’s capital. The proposal was the focus of a cy pres proceeding, necessitated because of the severe financial difficulties facing the nonprofit.
As discussed in Judge Okun’s opinion granting the trustee’s petition, the trustees of the Corcoran Gallery argued that continuing its operations as a stand-alone charity was impossible or impracticable. Borrowing from contracts law, the court agreed that the continued operation of the gallery by itself was "impracticable." Of special interest is the Court’s interpretation of “impracticability” under the doctrine of cy pres:
The Court’s review of the cases discussed above leads to the conclusion that a party fails to establish impracticability in the cy pres context if it merely demonstrates that it would be inconvenient or difficult for the party to carry out the current terms and conditions of the trust. Rather, a party seeking cy pres relief can establish impracticability only if it demonstrates that it would be unreasonably difficult, and that it is not viable or feasible, to carry out the current terms and conditions of the trust.
For those interested in a brief history of major events surrounding the formation and operation of the Corcoran Gallery, see A Corcoran Gallery of Art Timeline, also published in the Washington Post.
Thursday, August 7, 2014
In an opinion remarkable only because it is so thoroughly boring, the 7th Circuit recently held that ABA Retirement Funds, an Illinois not-for-profit corporation, did not meet the requirements for exemption from tax under IRC 501(c)(6). ABA Retirement Funds v. USA. Actually, the opinion is boring because the claim to exemption is so obviously ridiculous. How anybody could have claimed tax exempt status for what amounts to an attorney retirment fund management company is beyond me, but ABARF did and spent a lot of money insisting that they be granted that exemption too. The district court opinion is much more instructive and includes a helpful note on the integral part doctrine. The 7th Circuit pretty much refers us to that opinion and then discusses one or two aspects of the case as though writing a concurrence to the lower court. Here is what seems like a pretty bright line test for business leagues, according to the district court:
Parsing this text, the regulation [1.501(c)(6)-1] requires that an organization meet the following criteria to constitute a "business league":
It is an organization:(1) of persons having a common business interest;
(2) whose purpose is to promote the common business interest;
(3) not organized for profit;
(4) that does not engage in a regular business of a kind ordinarily conducted for profit;
(5) whose activities are directed to the improvement of business conditions at one or more lines of a business as distinguished from the performance of particular services for individual persons; and
(6) of the same general class as a chamber of commerce or a board of trade. The regulation also states that if an organization is "engaged in furnishing information to prospective investors to enable them to make sound investments," its purpose is not "to promote [a] common business purpose" and therefore it does not constitute a business league.
All ABARF did, on the other hand, was sell stuff exclusively to attorneys. It would be as if the Ford dealer down the street insisted that it was a univesity because it sold cars only to universities.
There is one other instructive highlight, though. The District Court opinion rejects ABARF's belated insistence that the integral part doctrine entitles it to exemption because ABA could have sold and managed retirement plans without losing its tax exempt status. ABARF arguement that the ABA could have maintained the retirement management without losing its tax exemption, implyies that the integral part doctrine allows a back door way of achieving tax exemption for what would have been an unrelated business -- albeit one insubstantial enough not to jeopardize the parent's tax exempt status. The district court correctly rejected this attempted slight of hand by noting that an unrelated business is, by definition, not "integral" to a parent's tax exempt status (duh!). An integral activity, on the other hand -- e.g., providing laundry services to a single exempt hospital parent -- can be dropped into that hospital's subsidiary, and that sub be exempt under the integral part doctrine.
Friday, June 20, 2014
As reported by The Chronicle of Philanthropy, Public.Resource.Org ("PRO") filed a lawsuit seeks to compel the IRS to release Forms 990 in a format that can be read and, thus, searchable by computers. The IRS practice to date is to convert all filed 990s into images, which renders the content therein incapable of being searched. Organizations that provide access to exempt organizations' 990s, like GuideStar and Charity Navigator, must manually enter the data in order to make it accessible to the public. PRO seeks to end the IRS practice that makes such forms effectively useless to organizations wishing to search the filed returns for specific data or information. The IRS argues that current open-records laws do not require it to utilize any particular format in making the information public.
According to The Chronicle, on Wednesday, June 18, 2014, Judge William Orrick (U.S. District Court for Northern District of CA) "tentatively" denied the IRS's motion to dismiss the lawsuit, thus allowing the lawsuit to proceed.
Tuesday, June 10, 2014
What are the many implications for continued tax exemption for the NCAA arising from the current anti-trust and licensing litigation? I don't really know yet but I have on my "to-do" list the task of reading the 157 page complaint. PBS's Frontline has an online source from which readers can learn all there is to know so far regarding the litigation.
I would really have loved to be sitting in the courtroom for however long it takes to listen in on the testimony and arguments. My initial hunches concerning the implications for 501(c)(3) status range from questions regarding whether the NCAA's has a substantial non-exempt purpose to whether paying players for the use of their likenesses implicates the prohibitions on private inurement, excess benefit and/or private benefit. The only problem though with logically thinking about the implications is that tax exemption for the NCAA is so terribly unprincipled in the sense that everyone knows the whole thing is built on a fictional house of cards. That was proven -- if proof was ever really needed anymore -- when the Service dared to suggest that advertising revenue from things such as the "Frito Lay" Fiesta bowl ought to be taxable. And did you know that Nick Saban is now something like the sixth or seventh highest paid head coach in all of televised football, college and pro? He is making about $7 million a year and well worth it he is, considering the largess he helps bring to 'Bama. A lot of other college head coaches make or will make close to the same, I imagine. And yet the University of Alabama and the NCAA keep on running completely tax exempt with nary a batted eyebrow. "Run Forest run!"
Thursday, May 29, 2014
In American Atheists v. Shulman, the U.S. District Court for the Eastern Division of Kentucky rejected three atheist organizations' contentions that the IRS unconstitutionally discriminates against non-religious tax-exempt organizations. Specifically, the Atheists alleged that the IRS’s differing treatment of churches as opposed to other tax-exempt organiations was unconstitutionally. Specifically, the Atheists requested that the Court issue a judgment “[d]eclaring that all Tax Code provisions treating religious organizations and churches differently than other 501(c)(3) entities are unconstitutional violations" of the Equal Protection laws of the Fifth Amendment, the First Amendment and the Religious Test Clause of Article VI, §3 of the Constitution. The Atheists claimed "upon information and belief a number of atheist organizations have tried to obtain IRS classification as religious organizations or churches under §501(c)(3) or to otherwise obtain equal treatment,” and “most of those applications and attempts were rejected by the IRS." However, the Court found that the Atheists admitted in pleadings that they themselves had never sought recognition as a religious organization or church under §501(c)(3). The Atheists responded that they have not applied for exemption as a religious organization or a church because seeking such a classification would "violate their sincerely held belief."
Nevertheless, the Court found that the Atheists lacked the necessary standing to bring the suit, in part because they could have applied for religious designation. The Court concluded that the Atheists failed to establish any injury-in-fact and their assertion that they would fail to qualify as a church or religious organization was "mere speculation." To the contrary, stated the Court, "[a] review of case law establishes that the words ‘church,’ ‘religious organization,’ and ‘minister,’ do not necessarily require a theistic or deity-centered meaning."
Over 2 years ago, we blogged about a unique lawsuit being filed by Z Street, a pro-Israel nonprofit corporation, against the IRS. Specifically, Z Street alleged that the IRS's "Israel Special Policy” utilized in reviewing the organization's application for Section 501(c)(3) status violated the organization's First Amendment rights in that the IRS policy constituted viewpoint discrimination. Z Street requested an injunction compelling the IRS to disclose the policy and its parameters and usage, and to refrain from such use in evaluating the organization's exemption application.
In a May 27 decision, the U.S. District Court for the District of Columbia denied the IRS's motion to dismiss the organization's complaint on all 3 grounds. The IRS presented three legal arguments that the Court lacked subject-matter jurisdiction over the organization's constitutional claim. First, the IRS argued that the Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421 (2013), precluded the Court from exercising jurisdiction. Second, it asserted that the Court could not grant the relief sought by the organization under the Declaratory Judgment Act (“DJA”), 28 U.S.C. § 2201 (2013). Finally, the IRS argued that Z Street's complaint was barred by the doctrine of sovereign immunity. In addition, the IRS asserted that Z Street failed to state a claim upon which relief can be granted because the organization has an adequate remedy at law (namely, 26 U.S.C. §7428), thereby foreclosing the equitable relief that it sought. Because the Court rejected the IRS's "core contention" that Z Street sought a determination on its eligibility for Section 501(c)(3) tax-exempt status, the Court rejected the IRS's assertions that the AIA, the DJA, or sovereign immunity barred the organization's request for equitable relief and that Z Street had an adequate remedy at law.
With respect to the remedies sought by Z Street, Judge Ketanji Brown specifically acknowledged:
In this regard, looking at the requested remedy as the D.C. Circuit requires, Z Street’s complaint requests only two things: (1) a declaration that the Israel Special Policy violates the First Amendment, and (2) an injunction that requires disclosure of information regarding the Israel Special Policy, bars the IRS from subjecting Z Street’s application for Section 501(c)(3) status to the Israel Special Policy, and that mandates that Z Street’s application be adjudicated “fairly” and “expeditiously.”
In the opinion's conclusion, Judge Brown opines:
Defendant [IRS] struggles mightily to transform a lawsuit that clearly challenges the constitutionality of the process that the IRS allegedly employs when it determines the tax-exempt status of certain organizations into a dispute over tax liability as a means of attempting to thwart this action's advancement,” Jackson said. “But the instant complaint, which in no way seeks an assessment of the taxes to be paid or even a determination of the Plaintiff's Section 501(c)(3) status, is not so easily deterred.
(Hat tip: Daily Tax Report)
Tuesday, April 22, 2014
A tax-exempt nonprofit that solicit contributions in California is challenging a demand from the California Attorney General's office that they provide unredacted copies of their IRS Form 990 Schedule B, which lists major donors. As most readers of this blog likely know, while Schedule B is submitted to the IRS the IRS is required to keep the names and other identifying information of the donors listed confidential. Similarly, while tax-exempt organizations are generally required to provide copies of their Forms 990 upon request, they can redact this donor identifying information before they do so. The organization that is challenging the demand is the section 501(c)(3) Center for Competitive Politics, which has filed a lawsuit in federal district court as detailed at the link above.
In a separate challenge to compelled disclosure of donors, according to a Washington Examiner article the section 501(c)(4) Campaign for Liberty, which is associated with Ron Paul, is challenging the ability of the IRS to require disclosure of donor information on Schedule B even if that information is not (supposed to be) disclosed publicly. While not completely clear from the article, it appears that the group is refusing to provide the required information and refusing to pay any fines imposed by the IRS as a result, presumably for filing an incomplete Form 990. These two challenges join an earlier challenge by the Tea Party Leadership Fund, a PAC and therefore presumably a section 527 tax-exempt organization, to donor disclosure required by the Federal Election Commission, as reported by NPR.
Friday, March 21, 2014
When the Center for Responsibility and Ethics filed a petition seeking mandamus earlier this year, John Columbo predicted that the case would be dismissed for lack of standing. And in fact, late last month the U.S. District Court for the District of Columbia dismissed CREW v. Treasury for lack of standing. What CREW was seeking as a substantive matter wasn't so unreasonable though. It wanted the Treasury to enforce the provision in 501(c)(4) so that groups claiming exemption under that statute adhere to the requirement that they engage "exclusively" in activities that promote social welfare. The same could be asserted with regard to 501(c)(3)'s requirement that groups claiming exemption under that statute engage "exclusively" in charitable activities. In both instances, the Treasury and courts have stated that Congress did not really mean "only" or "solely" but "mostly" or "firstly." And we all know what mischief those concessions have wrought. It seemed reasonable long ago when we first learned that "exclusively" did not actually exclude every other thing. But we might have avoided a whole lot of mischief and consternation if we had just said "this, and only this." Everything from "UBIT" with regard to 501(c)(3) to "candidate-related political activity" with regard to (c)(4) might have been avoided. Having decided that "exclusively" does not mean "only," Treasury now has to determine how much of something else is too much and has asked for comment on that. To be precise -- and why would we not want to be precise -- defining "exclusively" as anything other than 100% is both incorrect and, regardless of how much of something else is allowed, entirely arbitrary. Once we decide that "exclusively" can mean anything less than 100%, we can logically make it mean anything. So Treasury's request for comments regarding the meaning of "exclusively" becomes just a popular vote. Why do we even want to indulge the legal fiction that exclusively does not mean "omitting everything else" or "allowing for nothing else"? In hindsight, it would probably be better to adhere to the dictionary meaning of "exclusively."
Wednesday, December 4, 2013
A federal District Court in Wisconsin has struck down the exclusion from gross income for vcertain housing allowances provided to "ministers of the Gospel" by Internal Revenue Code § 107 as a violation of the Establishment Clause. As previously discussed here, the same court is also considering challenges to the church exemption from Form 990 filing and the alleged lack of IRS enforcement against churches for violating the political campaign intervention the prohibition. As John Colombo has detailed in this space, the key question in all of these cases - including in the almost certain government appeal of the housing allowance decision - will be whether the plaintiffs have standing to even bring these claims. For reasons Professor Colombo details, it is unlikely that they do. As a commentator to the TaxProf Blog post on this story noted, the judge in the housing allowance case also previously ruled that the National Day of Prayer presidential proclamation was unconstitutional, only to have that case dismissed on appeal for lack of standing. Nevertheless, this case and the other challenges are currently still alive and proceeding, although news reports state the judge has stayed her decision on the housing allowance pending appeal.
Wednesday, November 6, 2013
Matthew J. Lindsay (Baltimore) has posted "Federalism and Phantom Economic Rights in NFIB v. Sebelius" to SSRN. The abstract provides:
Few predicted that the constitutional fate of the Patient Protection and Affordable Care Act would turn on Congress’ power to lay taxes. Yet in NFIB v. Sebelius, the Supreme Court upheld the centerpiece of the Act — the minimum coverage provision (MCP), commonly known as the “individual mandate” — as a tax. The surprising constitutional basis of the Court’s holding has deflected attention from what may prove to be the decision’s more constitutionally meaningful feature: that a majority of the Court agreed that Congress lacked authority under the Commerce Clause to penalize individuals who decline to purchase health insurance. Chief Justice Roberts and the four joint dissenters endorsed the novel limiting principle advanced by the Act’s challengers, distinguishing between economic “activity,” which Congress can regulate, and “inactivity,” which it cannot. Because the commerce power extends only to “existing commercial activity,” and because the uninsured were “inactive” in the market for health care, they reasoned, Congress lacked authority under the Commerce Clause to enact the MCP. Critically, supporters of the activity/inactivity distinction insisted that it was an intrinsic constraint on congressional authority anchored in the text of Article I and the structural principle of federalism, rather than an “affirmative” prohibition rooted in a constitutional liberty interest.
This Article argues that the neat dichotomy drawn by the Chief Justice and joint dissenters’ between intrinsic and rights-based constraints on legislative authority is false, and that it obscures both the underlying logic and broader implications of the activity/inactivity distinction as a constraint on congressional authority. In fact, that distinction is animated less by the constitutional enumeration of powers or federalism than a concern about individual liberty. Even in the absence of a formal constitutional “right” to serve as a doctrinal vehicle, the justices’ defense of economic liberty operates analogously to the substantive due process right to “liberty of contract” during the Lochner era — as a trigger for heightened scrutiny of legislative means and ends — through which the justices constricted the scope of the commerce power.
Current scholarship addressing the role of individual liberty in NFIB v. Sebelius tends to deploy Lochner as a convenient rhetorical touchstone, to lend an air of illicitness or subterfuge to the majority’s Commerce Clause analysis. I argue that the Lochner-era substantive due process cases are both more nuanced and more instructive than judges and many scholars have realized. They illustrate, in particular, that constraints on legislative authority that are rooted in individual liberty and constraints on legislative authority that are rooted in enumerated powers and federalism can and do operate in dynamic relationship to one another. Reading NFIB v. Sebelius through this historical lens better equips us to interrogate the role that economic liberty plays in the majority’s Commerce Clause analysis, and provides an important alternative analytical framework to the structure/rights dichotomy advanced by the Chief Justice and joint dissenters. The activity/inactivity distinction not only portends a constitutionally dim future for federal purchase mandates, but may also herald more far-reaching restrictions on congressional interference with individual liberty, in which individual sovereignty assumes a place alongside state sovereignty in the Court’s federalism.
Thursday, September 19, 2013
I previously blogged about the downfall of the once $140 million per year Angel Food Ministries. According to U.S. Attorney Michael Moore, the heart of the problem was the greed of its founders, who pled guilty to using the charity's funds and other assets for personal gain in violation of federal fraud and money laundering statutes. Under a plea agreement, founder Joe Wingo and his son Andrew Wingo each received seven-year prison sentences, while Joe Wingo's wife and ministry co-founder Linda Wingo received five years of probation after pleading guilty to concealing a felony. A federal district court also ordered the defendants to pay almost $4 million in restitution and fines.
Wednesday, September 18, 2013
As readers of this blog know, two lawsuits challenging the preferential federal tax law treatment of churches and ministers and brought by the Freedom from Religion Foundation survived motions to dismiss on standing grounds . A year ago, the U.S. District Court for the Western District of Wisconsin found FFRF had standing to challenge the income tax exemption for parsonages and pastor housing allowances provided by Internal Revenue Code section 107. About a month ago, the same court concluded FFRF had standing to challenge the IRS's alleged lack of enforcement of the section 501(c)(3) political campaign intervention prohibition as against churches.
Finally, about four weeks ago the same court rejected the government's motion to dismiss FFRF's complaint challenging the exemption for churches from having to file an annual information return (the Form 990) with the IRS. Relying heavily on its decision in the first case it considered, the court found that FFRF alleged a sufficient injury in fact because it is not able to claim such an exemption since it does not qualify as a church. FFRF also challenged the exemption of churches from the exemption application (Form 1023) requirement applicable to other groups seeking recognition of their section 501(c)(3) status, but the court questioned whether FFRF and the other plaintiff in the case had a future injury in fact that would justify the injunctive relief they were seeking given that both groups had already filed their applications and paid their application fees. It therefore asked the plaintiffs to demonstrate why their second claim should not be dismissed.
As John Colombo detailed in his previous post about the second case, and for the reasons Johnny Rex Buckles described in this space more generally and I also discussed with respect to Establishment Clause claims, this trio of decisions appears inconsistent with long-standing precedents relating to standing in the tax area. The judge in all three cases also has previously been reversed on a standing issue relating to an Establishment Clause challenge to the National Day of Prayer brought by FFRF. In that case the district court found the statute requiring that the President proclaim a National Day of Prayer each year to be a violation of the Establishment Clause, but the U.S. Court of Appeals for the Seventh Circuit concluded FFRF and the other plaintiffs lacked standing to bring the case (Freedom from Religion Foundation v. Obama, 651 F.3d 803 (7th Cir. 2011)).
A similar fate for the trio of tax cases therefore seems likely as well. Before the cases get to the appellate court, however, there may be some interesting information uncovered in discovery. While the housing allowance and Form 990 cases appear to turn solely on the statutory provisions and so should not require much if any factual discovery, the lack of enforcement case would appear to require discovery regarding the extent to which the IRS has enforced the political campaign intervention prohibition as against churches and non-churches in recent years. While there is some anecdotal information available regarding such enforcement efforts, since the quiet end of the IRS's Political Activity Compliance Initaitive after the 2008 election season (and perhaps earlier - the IRS never issued a report for that election season) there has not been more comprehensive information available regarding enforcement in this area. While not FFRF's primary aim, the discovery in their lawsuit may reveal a lot about the frequency and results of that enforcement.
In Department of Texas v. Texas Lottery Commission, a panel of the U.S. Court of Appeals for the Fifth Circuit confirmed its earlier decision that upheld as constitutional a Texas statute allowing charitable organizations to raise money by holding bingo games but conditioned on the money so raised only be used for the organizations' charitable purpose and not for certain types of political advocacy, including lobbying. While the result is perhaps not surprising, the decision is interesting in a couple of respects.
First, in rejecting a standing argument by the defendants, the court concluded that political advocacy such as lobbying is not inherently inconsistent with serving a charitable purpose. While it noted that federal tax law limits the amount of political advocacy by some nonprofit organizations, it did not find that those limits supported the argument such advocacy was inherently inconsistent with federal tax exemption. This is definitely the right conclusion, but it is a relief to see the court clearly state this is the case in the face of the defendants' argument to the contrary.
Second, the decision required the court to discuss the application of the unconstitutional conditions doctrine to a speech-related restriction on nonprofit organizations in the wake of Citizens United. There has been some speculation that Citizens United may have undermined earlier decisions finding such restrictions to be constitutional if tied to a government subsidy, although most commentators have rejected such views. See, e.g., Paul Weitzel, Protecting Speech from the Heart: How Citizens United Strikes Down Political Speech Restrictions on Churches and Charities, 16 Texas Review of Law & Politics 155 (2011). The court flatly rejected this argument, concluding that Regan v. Taxation with Representation and Rust v. Sullivan remain good law and distinguishing Citizens United on the grounds that (1) Citizens United did not involve a government subsidy to which the speech restriction at issue was tied and (2) Citizens United involved an outright ban on a specific type of political speech as opposed to a limit on using certain (government subsidized) funds for such speech.
Third and finally, unlike the panel's original decision the new, substituted decision drew a dissent. Chief Judge Carl Stewart concluded that the speech restriction was in fact an unconstitutional condition. His point of disagreement was that in his view permitting charities to raise money by holding bingo games did not constitute a "subsidy" in that no funds from the public fisc went to the charities who held such games. Absent a subsidy, he concluded that TWR and Rust were not applicable and so, under Citizens United, the Commission had the burden of identifying a sufficiently compelling reason for the speech restriction, which it failed to do.
Friday, August 23, 2013
Once I put away the blogging about the Van Hollen v. IRS case, I started to tackle the pile of journals and magazines that the College of Law's circulation department dutifully sends me daily. And what did I see on the cover of the Virginia Tax Review, Volume 32, No. 4 (Spring 2013):
- Chevron's Conflict with the Administrative Procedures Act by Patrick J. Smith, a partner with Ivins, Phillips & Barker in Washington D.C.
Given the apparent issue in the Van Hollen case, this seems very timely - it's in the "to read over the weekend pile." Which weekend, of course, remains to be seen, but that has nothing to do with the article!
Following up on my post from yesterday, Chris Van Hollen (and Democaracy 21, Campaign Legal Center, and Public Citizen) did file suit yesterday against the IRS and Treasury. For those of you interested in reading the Complaint, it is in the District Court for D.C., Case 1:13-cv-01276. I retrieved my copy from Bloomberg BNA online; if anyone has a public link, let me know and I'll post it. A quick summary
1. It's a proceding under the Administrative Procedure Act (APA), 5 U.S.C. 702/703/704/706(1)/and 706(2)(A), "to compel agency action unlawfully withheld and unreasonably delayed, and to set aside agency action that is contrary to law."
2. Quote: "By redefining 'exclusively' as 'primarily' in violation of the clear terms of its governing statutes, the IRS permits tax-exempt social welfare organizations to engage in substantial electoral activities in contravention of the law and the court decisions interpreting it" (p. 2).
3. In answer to my question of yesterday, the Plaintiffs assert the following personal harms:
- Denial of information regarding election expenditures as Section 501(c)(4) organization do not need to disclose donors, and
- Candidates such as Van Hollen and their organizations must compete on unequal terms with tax-exempt organizations that are not subject to disclosure.
4. The Complaint specifically alledges that the IRS' recent 40% safe harbor pronoucements allows too much non-exempt political activity.
5. Quote: "Electoral campaign spending by section 501(c)(4) organizations soared after the U.S. Supreme Court's decisions in FEC v. Wisconsin Right to Life ... and Citizens United v. Federal Election Commission .. , which, respectively, narrowly construed and then invalidated federal laws prohibiting corporate electoral campaign expenditures. In the wake of those decisions, section 501(c)(4) organizations became the vehicles of choice for mobilizing anonymous contributions for political purposes." (p. 9, cites omitted).
6. For those interested, the paragraphs that follow the quote above give some signficant figures regarding Section 501(c)(4) spending since Citizens United - e.g., in the 2012 presidential election, approximately $310 million in electoral campaign spending was by non-disclosing groups including section 501(c)(4) and 501(c)(6) organizations. (p. 11).
7. The APA statutory standard of review is "arbitrary, capricious, and abuse of discretion, or not in accordance with law." (p. 19).
P.S. 8/26 Reader Russell Willis was kind enough to point me to the following link for the petition:
Thursday, August 22, 2013
The Washington Post reports that Chris Van Hollen (D-MD) is planning on filing suit against the IRS regarding the Section 501(c)(4) regulations that have been the spotlight as of late. Van Hollen, the ranking member of the House Budget Committee, will be the lead plaintiff in the suit, along with Democracy 21, The Campaign Legal Center, and Public Citizen. According to the Post, CREW has a similar suit pending.
If I understand the Post's article correctly**, the suit will focus on the validity of the IRS regulations under Section 501(c)(4). As we all probably know (ad nauseum) at this point, Section 501(c)(4) provides that an organization exempt under that section must be "operated exclusively for the promotion of social welfare" (emphasis added).
Treas. Reg. Section 1.501(c)(4)-1(a)(2) provides, "[a]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community" (emphasis added). As the promotion of social welfare does not include political campaign activity, it follows that an organization that is organized primarily for political campaign intervention purposes cannot meet the "exclusively" test of the statute.
I'm assuming that the lawsuit will take the position that it was an abuse of IRS discretion to issue regulations interpreting "exclusively" to mean "primarily" in the context of the amount of allowable non-social welfare activities. That raises a number of interesting issues:
For my civil procedure and con law friends, it's been a very long time since I've looked at standing issues. In the exemption context, of course, there is no taxpayer standing - but this isn't an exemption case. Is Van Hollen a plaintff because he is asserting that he personally has been injured by the enforcement of this rule (for example, because of the ability of opponents to get Crossroads funding or something?) Is there some other basis for standing?
For my admin law friends, what is our standard of review? Is this still straight up Chevron as a agency interpretation of statute with the force of law? Has any of that changed given recent Supreme Court action in this area (I am rapidly getting to the outer edge of my knowledge here). Does the fact that the IRS has recently come out with new 501(c)(4) review guidelines matter in the least?
Are we worried about collateral damage? The statutory language of Section 501(c)(3) also contains the word "exclusively." Treas. Reg. Section 1.501(c)(3)-1(c)(1) states, "[a]n organization will be regarded as 'operated exclusively' for one or more exempt purposes only if it engages primarily in activities which accomplish" one or more exempt purposes (emphasis added). It's always been interesting to me that in the Section 501(c)(4) context, some are willing to take the position that primarily means 51% , so you can push your political activities to 49% (of... something). In the Section 501(c)(3) context, I personally would be unwilling to tell a client that they can do that much non-exempt activity. Heck, I get queasy if a charity is in double digits percentage (of... anything) of non-exempt activity. But, technically, it is the same issue of statutory/regulatory construction.
This Section 501(c)(4) ambiguity could all be fixed by legislation, of course. Too bad none of the litigants has the ear of a Congressm.... um... wait....
(h/t Jonathan Adler via The Volokh Conspiracy Daily for pointing to this article)
** The Post article states, "Current law says the organizations must engage 'exclusively' in social welfare activities, but IRS tax code requires only that they are 'primarily engaged' in such purposes." Of course, the tax code is current law, the tax code does not belong to the IRS, and the primarily engaged test is in the Regs. So I'm assuming that's what the Post meant.