Nonprofit Law Prof Blog

Court Confirms Loss of 501(c)(6) Status by ABA Retirement Funds

The United States District Court for the Northern District of Illinois has ruled that the ABA Retirement Funds did not qualify as a tax-exempt section 501(c)(6) organization for tax years 2000 to 2002 because its performs services for individuals rather than for the industry as a whole and because it is engaged in a business normally carried on for profit, either of which characteristic would disqualify it for such status.  The court also found that the organization is not in the same general class a chamber of commerce or board of trade and was not an integral part of the ABA. 

While the ruling only addresses the specific tax years at issue, a Forbes article published when the ABA Retirement Funds initially filed its refund lawsuit states that the organization filed an application for exemption in 2004 but the IRS rejected that application in 2005.  According to this article, the exemption would have permitted the organization to avoid taxes on the marketing income its earns from promoting ABA-branded retirement plans.  The organization apparently outsources the actual management of its retirement plans to various third-party vendors that collect the fees related to those plans.

LHM

Supreme Court: When Can Government Funding Have Speech-Related Strings

The Supreme Court of the United States heard oral arguments last month in a case that raises a very important issue for the many tax-exempt nonprofit organizations that receive government funding in one form or another:  when, if ever, can a government require that the recipient of government funding for a particular program adopt an explicit policy that would apply to all of the organization's activities whether government-funded or not?  In Agency for International Development v. Alliance for Open Society International, Inc., the specific issue is "Whether the United States Leadership Against HIV/AIDS, Tuberculosis, and Malaria Act of 2003, 22 U.S.C. § 7631(f), which requires an organization to have a policy explicitly opposing prostitution and sex trafficking in order to receive federal funding to provide HIV and AIDS programs overseas, violates the First Amendment."  The Second Circuit Court of Appeals panel that heard the case split 2-1, with the majority concluding that the requirement did violate the First Amendment.  The case involves application of the much criticized "unconstitutional conditions" document, and the questioning at oral argument did not provide a clear indication of how the Court will resolve the case, according to veteran Supreme Court observer Lyle Denniston's analysis.  The case is further complicated by the fact that Justice Kagen has recused herself, so there is the possibility of a 4-4 tie vote that has the effect of upholding the lower court decision but without clear guidance on this issue.  A decision is expected by the end of June.

LHM

Perhaps We Should Be Like the Philippines?

For a number of years, I've espoused the view that we should expand the unrelated business income tax to a "commercial activity" tax - that is, a charity engaged in any commercial activity should pay taxes on any net revenues from that activity, whether or not the activity is "related" in some way to the organization's charitable purpose.  See, e.g., John D. Colombo, Commercial Activity and Charitable Tax Exemption 44 WM. & MARY L. REV. 487 (2002).  I've also opined that if we did this, we could grant tax exemption rather broadly to permit organizations with some legitimate charitable purpose the ability to get tax-deductible contributions for their charitable activities, while still fully taxing any commercial activity.  I believe this would simplify current law and compliance.  For example, museum gift shop revenues would be fully taxable, instead of having to parse whether specific sales were "related" or "unrelated" as is currently the case (e.g., an art museum gift shop can sell replicas of art, art books, "arty" postcards and the like without UBIT liability, but sales of science books or "I Love NY" coffee mugs are subject to the UBIT; see, e.g., Rev. Rul. 73-104).  A charity that operates a pay garage would pay taxes on the garage revenues as a whole, without allocating between parking receipts that are "related" to charitable activities and those that are not.  I readily admit there are still some interpretive issues (are museum admission charges "commercial" revenues?), but I think these issues would be fewer and easier to resolve than esoteric questions of "relatedness."

It appears that a recent decision by the Supreme Court of the Philippines interpreting its statutory law with respect to charities has more or less adopted my approach with respect to nonprofit hospitals (to be clear, they didn't do this because they read anything I wrote; still, this indicates my approach isn't completely crazy).  In Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., G.R. No. 195909, September 26, 2012 (full opinion here; an excellent summary is available here), the Philippine Supreme Court held that Philippine law distinguished between a fully exempt "charitable" hospital or educational institution (whose activities must be exclusively charitable) and a private nonprofit hospital or educational institution engaged in some charitable and some commercial activity.  With respect to the latter, the organization is required to pay income tax on their commercial revenues (albeit at a reduced rate as provided in Philippine law), but not required to pay tax on revenues resulting from charitable activities.  In the context of the private nonprofit hospital at issue, the court held that revenues from paying patients would be taxable (again, at the reduced rate provided for by Philippine law), because these revenues were part of a for-profit business.

The Court finds that St. Luke’s is a corporation that is not “operated exclusively” for charitable or social welfare purposes insofar as its revenues from paying patients are concerned. This ruling is based not only on a strict interpretation of a provision granting tax exemption, but also on the clear and plain text of Section 30(E) and (G). Section 30(E) and (G) of the NIRC requires that an institution be “operated exclusively” for charitable or social welfare purposes to be completely exempt from income tax. An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B).

In other words, revenues from commercial (e.g., for-profit) activity (in this case, paying patients) are taxable, but the organization remains tax-exempt on its actual charitable activities.  There is no "relatedness" test here as under our UBIT; the only question is whether an activity is for-profit (commercial).

While this decision obviously is the result of the sui generis statutory law in the Philippines, if it works there, I don't see any reason why it couldn't work here . . . the description of St. Luke's operations in the opinion sounds like a pretty typical nonprofit hospital here in the U.S. (We'll have to talk, though, about this preferential rate stuff . . .).

JDC 

Pulpit Freedom Sunday to Again Challenge Political Campaign Prohibition

Over 1,300 religious leaders are prepared to deliberately violate the section 501(c)(3) prohibition on political campaign activity this Sunday, October 7, 2012, by endorsing or opposing a political candidate for public office from their pulpits.  Sponsored by the Alliance Defending Freedom, the purpose of Pulpit Freedom Sunday is to openly exercise their claimed First Amendment freedom of religious expression, which participants claim is violated by the "1954 Johnson Amendment" to section 501(c)(3).  Since its origination in 2008, the Alliance has sought a test case that can be brought to the U.S. Supreme Court, with the desired result of the Johnson Amendment being declared unconsitutional as to churches.

However, the IRS is presently unable to adequately respond to participant churches hoping for the commencement of a legal battle over the statutory prohibition.  As reported by the Daily Tax Report, the proposed regulations to the church tax inquiry rules under section 7611 have not yet been finalized to name the IRS official responsible to carry out the statutorily prescribed inquiry rules.  The current proposed regulations would name the IRS Director of Exempt Organizations, a position currently held by Lois Lerner.

For additional perspectives and opinions on Pulpit Freedom Sunday, see the following:

Steve Siebold, "Pulpit Freedom Sunday - Should the Church be Tax-Exempt?"  (Huffington Post's The Blog)

Meredith Bennett-Smith, "Pastors to Challenge IRS Ban on Political Speech with 'Pulpit Freedom Sunday'"  (Huffington Post, containing Fox News video)

NAM

 

Federal Court Rules Group Has Standing to Challenge Pastor Housing Allowance

Christianity Today reports that the U.S. District Court for the Western District of Wisconsin has concluded that the Freedom from Religion Foundation (FFRF) has standing to challenge the income tax exemption for parsonages and pastor housing allowances provided by Internal Revenue Code section 107 because FFRF has altered its salary structure to provide housing allowances, but those allowances do not qualify for exemption since the recipients are not ministers.  According to a FFRF press release about the decision, its lawsuit seeks a declaration that section 107 violates the First Amendment's Establishment Clause.  The case, which is only the latest attack by FFRF on section 107, raises the interesting question of whether the Supreme Court's recent narrowing of the Establishment Clause exception to the general rule that taxpayers lack standing to challenge tax provisions benefiting others can be avoided by creating a fact pattern that is identical to the one required under the challenged provision except for the lack of a religious element.  For example, could a non-religious nonprofit that functions in a manner very similar to a church challenge the exemption for churches from having to file annual information returns (the Form 990)?  The outcome of this lawsuit could therefore have even larger ramfications than the possible end of the pastor housing allowance exemption.

(Hat tip:  ECFA)

Correction:  The original version of this post gave the Washington Ethical Society as an example of a non-religious nonprofit that appears to function in a manner very similar to a church.  An astute reader brought to my attention that the Washington Ethical Society is in fact actually classified as a church by the IRS, so I have corrected the post by removing that reference.  My thanks for the fact checking.

LHM

Federal Court Denies 501(c)(3) Tax-Exempt Status for "Family Trust" Because of Inurement and Commerciality

Earlier this week the U.S. District Court for the District of Columbia denied exemption under section 501(c)(3) for an entity that serves as the trustee for a trust benefiting over 300 disabled and elderly individuals. The court's conclusion with respect to private inurement is not surprising given the apparent failure of the organization to provide comparability data to support the amount of compensation paid to its founder.  What is, however, somewhat troubling is the relatively thin factual findings the court makes with respect to its conclusion that the organization had a substantial non-exempt purpose under the commerciality doctrine, in part because two of the three factors relied upon the court - a reliance solely on fees and significant profits - are not uncommon among groups that routinely qualify for section 501(c)(3) status.

In Family Trust of Massachusetts, Inc. v. United States, the plaintiff organization had sought a declaratory judgment that it qualified for tax-exempt status under section 501(c)(3) after the IRS had not ruled on its exemption application within 270 days.  As detailed in the opinion, the trust overseen by the organization permits disabled recipients of Supplemental Security Income, Medicaid, and other government benefits to benefit from assets, held by the trust, that normally would be in excess of federally allowed limits.  The court found two fatal flaws with the activities of the Family Trust. 

First the individual who founded and controlled the organization had received escalating compensation (increasing to $70,000 annually in 2009) as the net revenue from the assets controlled by the trust grew (reaching $362,524 in 2009), and the Family Trust failed to provide evidence that the amount received was reasonable in light of the services provided.  More specifically, while the Family Trust asserted it had gathered comparable compensation data through informal contacts with similar organizations, it failed to provide any specific comparability data to the IRS as part of the application process. 

Second, the court concluded that the Family Trust ran afoul of the commerciality doctrine because (1) it had relied solely on the fees it imposed on its members for its revenues, as opposed to contributions or other sources of income, (2) it had a significant profit margin (that correlated with the founder's increasing salary), and (3) the founder's dual role with the Family Trust and his elder law legal practice suggested that the availability of the trust was effectively a commercial product that enhanced the attractiveness of his legal practice to potential clients (some of whom also took advantage of the trust). 

LHM

 

Tax Court Rejects Deduction for House Donated for Fire Department Training Exercises

In Patel v. Commissioner, 138 T.C. No. 23, the full Tax Court rejected taxpayers' attempt to claim a charitable contribution deduction for the donation of their house for fire department training exercises.  As is common in these cases, the taxpayers wanted the house destroyed so they could build a new one on the same piece of land.  While the Seventh Circuit previously rejected a similar deduction, the Tax Court's reasoning for the denial was different.  While the Seventh Circuit concluded that the net value of the "gift" was actually zero given that the training exercise saved the taxpayers $10,000 in demolition costs, the Tax Court in Patel concluded that the deduction failed because under the applicable state law a house is regarded a part of the land, and even if the house is considered separately from the land the taxpayers retained significant ownership interests in the house and only granted the fire department a "mere revocable license that does not vest any property interest in the fire department."  As a result, the taxpayers only donated a partial interest in the property, which does not qualify for a deduction under Internal Revenue Code section 170(f)(3).

LHM 

Bad News for Political 501(c)(4)s: 4th Circuit Upholds "Major Purpose" Test for Political Committees

In a case with potentially major ramifications for politically active section 501(c)(4) organizations, the U.S. Court of Appeals for the Fourth Circuit has upheld the Federal Election Commission's "major purpose" test for determining whether an organization is a political committee or PAC and so subject to extensive disclosure requirements.  As described in the opinion, under the major purpose test "the Commission
first considers a group’s political activities, such as spending on a particular electoral or issue-advocacy campaign, and then it evaluates an organization’s 'major purpose,' as revealed by that group’s public statements, fundraising appeals, government filings, and organizational documents" (citations omitted).  The FEC's summary of the litigation details the challenge made in this case:

A group or association that crosses the $1,000 contribution or expenditure threshold will only be deemed a political committee if its "major purpose" is to engage in federal campaign activity. [The plaintiff] claims that the FEC set forth an enforcement policy regarding PAC status in a policy statement and that this enforcement policy is "based on an ad hoc, case-by-case, analysis of vague and impermissible factors applied to undefined facts derived through broad-ranging, intrusive, and burdensome investigations . . . that, in themselves, can often shut down an organization, without adequate bright lines to protect issue advocacy in this core First Amendment area."  [The plaintiff] asks the court to find this "enforcement policy" unconstitutionally vague and overbroad and in excess of the FEC’s statutory authority.

In a unanimous opinion, the court concluded that the FEC's current major purpose test is "a sensible approach to determining whether an organization qualifies for PAC status.  And more importantly the Commission's multi-factor major-purpose test is consistent with Supreme Court precedent and does not unlawfully deter protected speech."  In doing so, the court chose to apply the less stringent "exacting scrutiny" standard instead of the "strict scrutiny" standard because, in the wake of Citizens United, political committee status only imposes disclosure and organizational requirements but no other restrictions.  While the plaintiff here (The Real Truth About Abortion, Inc., formerly known as The Real Truth About Obama, Inc.) is a section 527 organization for federal tax purposes, the same test would apply to other types of politically active organizations, including section 501(c)(4) entities.

Hat Tip:  Election Law Blog

LHM

For Lack of the Right Paperwork, $18.5 Million in Charitable Contribution Deductions Lost

I often tell my tax students that part of their job is to get the paperwork right.  I now have a new illustration of the importance of doing so from the Tax Court's decision in Mohamed v. Commissioner.  As the court details, there was no question regarding the contributions themselves and initially the dispute was solely over their value - which the court concluded may very well have been more than the claimed $18.5 million.  The ultimately fatal problem, however, was the paperwork documenting the real estate contributions at issue.  Specifically, the court found that the taxpayers failed to obtain a qualified appraisal before the due date of the relevant returns, which appraisal had to be from an appraiser other than the donor or taxpayer, and failed to attach an appraisal summary to those returns.  Here the donor and taxpayer, who is a certified real-estate appraiser, had appraised the properties himself and, relying solely on the Form 8283 without consulting the instructions for that form, had failed to conform the statement he attached to the returns to the appraisal summary requirements.  The taxpayers' attempts to challenge the validity of the regulations imposing these requirements and to claim "substantial compliance" with those requirements were unsuccessful.  The court therefore regretfully denied the deductions, concluding:

We recognize that this result is harsh--a complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions--all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions. But the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.

For news coverage of the decision, see the Wall Street Journal.

LHM

501(c)s Avoid "Electioneering Communications" in Wake of Disclosure Decision

The Washington Post reports that the U.S. Chamber of Commerce will change it communication strategy to avoid "electioneering communications" - broadcast, cable, or satellite ads that clearly identify a candidate, reach a significant number of relevant electorate, and are run within a certain timeframe before the relevant election - while embracing express advocacy, that is ads that expressly support or oppose candidates.  The shift for the U.S. Chamber's planned $50 million of spending during the 2012 election cycle is driven by the recent federal district court decision in Van Hollen v. FEC, and the decision by the U.S. Court of Appeals for the District of Columbia Circuit not to stay the lower court decision pending appeal. 

The lower court decision rejected a Federal Election Commission promulgated regulation limiting the public disclosure of contributors to organizations making electionering communications to contributors who made their contributions for the purpose of furthering electioneering communications.  Instead, the court concluded the language of the relevant statute requires the public disclosure of all contributors (above a certain dollar threshold) to organizations that make electioneering communications, unless such organizations establish a separate segregated fund for making such communications and then all contributors (again, above a certain dollar threshold) to such a fund must be disclosed.  The decision does not, however, reach the rules for disclosing contributors to organizations that engage in express advocacy, which apparently is the basis for the U.S. Chamber's shift.  Other section 501(c) organizations are likely to follow suit, although many will probably avoid both electioneering communications and express advocacy altogether.  For more information, see the FEC summary of the case.  Law firm alerts regarding the decision are publicly available from Caplin & Drysdale (my former firm), Covington & Burling,  Harmon, Curran, Spielberg & Eisenberg, and King & Spalding.

LHM

What is a Religious Organization?

Over 40 Catholic organizations (including my employer, the University of Notre Dame) have filed coordinated lawsuits against the federal government challenging a regulation that would require the group health insurance sponsored by most employers to cover birth control and other services that are contrary to Catholic teaching.  See Notre Dame press release, the Washington Post blog entry.  One among the many interesting aspects of this dispute is the definition of a "religious employer," which is critical because group health plans sponsored by religious employers are exempt from the requirement.  As noted in the background section of a recently released Proposed Rule that the federal government is hoping will resolve this dispute,

a religious employer is one that (1) has the inculcation of religious values as its purpose; (2) primarily employs persons who share its religious tenets; (3) primarily serves persons who share its religious tenets; and (4) is a non-profit organization described in section 6033(a)(1) and section 6033(a)(3)(A)(i) or (iii) of the Code.

Since the first three prongs of the definition are relatively vague (for example, what are the thresholds for "primarily employs" and "primarily serves"?), arguably the narrowest part of this definition is the fourth prong that refers to two of the mandatory exceptions from having to file the Form 990 annual return otherwise generally required for organizations exempt from tax under section 501(a).  As the background section for the proposed rule elaborates, "[s]ection 6033(a)(3)(A)(i) and (iii) of the Code refers to churches, their integrated auxiliaries, and conventions or associations of churches, as well as to the exclusively religious activities of any religious order." 

Churches, and conventions or associations of churches, are of course religious organizations under section 501(c)(3) but many clearly religious organizations do not qualify as churches (or conventions or associations of churches) for federal tax purposes because "church" for these purposes is limited to organizations that generally have in-person worship meetings and other characteristics common to the historical, Western understanding of a "church."  See, e.g., the previous blog entry regarding the Foundation of Human Understanding case.  The definition of intergrated auxillary is more complicated, but in general an intergregated auxillary must be both affiliated with a church or a convention or association of churches and, most critically, be "internally supported," which is not the case if an organization offers admissions, goods, services or facilities (e.g., educational or health care services) for sale to the general public and recevies more than 50 percent of its support from a combination of governmental sources, public soliciation of contributiosn, and receipts from such sales.  See 26 C.F.R. 1.6033-2(h).  It is this last point that places the University of Notre Dame and presumably the other plaintiffs in these lawsuits outside of this exception. 

This dispute therefore highlights an increasingly important issue: assuming that for constitutional or policy reasons it is required or desirable to generally grant "religious" organizations exemptions from laws that would conflict with their religious beliefs, how broad should the definition of a "religious" organization be? Here the federal government has chosen a relatively narrow definition that was created for a different purpose (Form 990 filing exemptions), and at the end of the day it is the narrowness of this tax-based definition that has led to these lawsuits.

LHM

Common Cause Rallies to Save the Cato Institute & More Thoughts re the Cato Dispute

In reaction to the controversy over the Koch brothers' attempt to take control of the Cato Institute, previously blogged about here, Common Cause - yes, Common Cause - is supporting a public "Save the Cato Institute Rally" in Washington, D.C. and has urged the IRS to review the Koch brothers' actions.  The rally is apparently organized by United Republic, which describes itself as "a new organization fighting the corrupting influence of well-financed special interests over American politics and government."  As for the IRS complaint, in its letter Common Cause cites a Chronicle of Philanthropy article in which Marcus Owens, former IRS Exempt Organizations director, is quoted as saying that the dispute reveals a "fatal flaw" in Cato's structure.  That flaw is that Cato has private shareholders who appear to be able to sell their rights in the organization.

I agree with Marc that if the ownership of the Cato Institute's "capital stock" carries with it the ability for the owners, whether individually or acting collectively, to sell their shares to the highest bidder that is inherently inconsistent with section 501(c)(3) status.  If, however, the capital stock by its very terms prohibits such a transaction or any other transaction that would permit the owners to financially reap the benefit of their ownership of the shares, and also prohibits any change to its terms that would eliminate this restriction, then I think there is a reasonably strong argument that the capital stock provision of the articles (when combined with the private inurement prohibition also found in the articles) is not automatically inconsistent with the organizational test.  Cato's Forms 990s (available on Guidestar) state Cato has four shareholders with 16 shares each, that those shareholders elect the board of directors, and that the shareholders may remove directors by majority vote, but they do not provide any more details.  The various shareholder agreements, which are available through a link at the bottom of one of the Washington Post articles about this dispute, appear to limit the price that can be paid for the shares to their original purchase price, which the article indicates was $16 or $1 per share, however.

That said, I have not seen all of the relevant documents and I do not claim any expertise when it comes to Kansas law, under which Cato is incorporated, including how that law would apply to the current litigation.  I therefore think the jury is still out on whether this admittedly unusual governance structure is inherently inconsistent with section 501(c)(3) status or is only potentially so, in that control by a limited group of individuals – however provided for legally – raises a significant risk of private inurement inconsistent with 501(c)(3) status.

LHM

7th Circuit Rejects Charitable Contribution Deduction for Donated Home Used for Fire Department Training

The U.S. Court of Appeals for the Seventh Circuit recently affirmed the Tax Court's denial of a $76,000 charitable contribution deduction for a house donated by the taxpayers to a local fire department for use in a firefighting training exercise.  The exercise resulted in the demolition of the house, which then permitted the taxpayers to proceed with their plan to build a new house on the same location. In Rolfs v. Commissioner, the appellate court concluded that by conditioning the donation on the house being destroyed, the taxpayers effectively reduced the net value of the gift to zero given that the value to the taxpayers of the demolition services provided by the fire department was approximately $10,000.

Previous Coverage: Tax Court Rejects Deduction for House Donated to Fire Department for Training

Hat Tip: TaxProf Blog

LHM

11th Circuit Rules Parsonage Allowance Limited to One Home

I previously blogged about a divided Tax Court decision concluding that the parsonage allowance could extend to more than one home, a decision that generated concern from the ever-vigilant Senator Charles Grassley. Senator Grassley can now rest easy, as the U.S. Court of Appeals for the Eleventh Circuit has now reversed the Tax Court.  In Commissioner v. Driscoll, the Court of Appeals concluded that the phrase "a home" in Internal Revenue Code section 107 both as a textual matter and based on the relevant legislative history should be read in the singular.  Christian Singer Phil Driscoll and his wife will not, therefore, be permitted to exclude from their gross income the rental allowance for their second home.

Hat Tip:  TaxProf Blog (with a chart of the additional exclusion claimed for the second home)

LHM

Z Street's Unconstitutionality Claim Against IRS Continues

In late August 2010, Lloyd Mayer blogged about Z Street, a pro-Israel nonprofit corporation, that had filed a complaint alleging that the IRS was delaying consideration of its application for recognition of section 501(c)(3) tax-exempt status because the Service was determining whether the group's activities contradict the current Administration's policies.  The nonprofit asserted First Amendment free speech concerns.  The U.S. District Court for the Eastern District of Pennsylvania recently determined that it lacked jurisdiction under IRC §7428, pertaining to declaratory judgments in suits related to the classification of organizations under Section 501(c)(3), and transferred the case to the U.S. District Court for the District of Columbia.  In a footnote to its order, the Eastern Pennsylvania District Court agreed with the nonprofit's First Amendment assertions:

The Complaint states, inter alia, “Wherefore, Plaintiff seeks a Declaration that Defendant’s substance and application of the Israel Special Policy to any application for tax-exempt status constitutes discrimination among viewpoints and a violation of the Plaintiff’s right to freedom of speech as guaranteed by the First Amendment to the United States Constitution.”  The Court shares Plaintiff’s view that this is a case about constitutionally valid process, and finds that 26 U.S.C. § 7428 is the statute which establishes Plaintiff’s right to challenge the IRS’s 501(c) classification process.

Z Street filed an amended complaint in December 2010, which sets forth additional information on the IRS process involved with respect to the organization's exemption application.

(Hat tip:  TaxProf Blog)

NAM

No Supreme Court Consideration of Political Activity Ban

Earlier this week the Supreme Court of the United States denied the petition for a writ of certiorari filed by Catholic Answers (see docket) in its case challenging the Internal Revenue Code section 501(c)(3) prohibition on political campaign intervention.  As previously blogged, the lower courts had dismissed the tax refund case as moot because the IRS had refunded the excise taxes assessed on the alleged political campaign intervention expenses under section 4955.  For reasons I stated last fall, the denial is no surprise. Nevertheless, it shows how difficult it will be for groups challenging the ban to actually have their day in court, at least as long as the IRS either refuses to penalize their actions (remember All Saints Episcopal Church in Pasadena?) or drops any penalty when challenged, as happened here.

LHM

Pulpit Politics and the Ministerial Exception

A little over a week ago Professor Vaughn James blogged in this space about the Supreme Court's recent Hosanna-Tabor Evangelical Lutheran Church and School decision unanimously concluding that religious organizations benefit from a "ministerial exception" to employment discrimination laws.  I want to focus on one possible ramification of this decision that does not appear to have been noted publicly yet - does the reasoning supporting this exception also support a "pulpit exception" to the tax law prohibition on political campaign intervention?   (Shameless self promotion - I explored this possibility in the last part of my 2009 Boston University Law Review article on Politics at the Pulpit.) 

The strongest argument for not having such a "pulpit exception" is that the prohibition is a valid and neutral law of general applicability and so does not violate the Free Exercise Clause under the reasoning of Employment Div v. Smith, 494 U.S. 872 (1990).  But in Hosanna-Tabor the EEOC and the plaintiff were unsuccessful in making this argument with respect to the Americans with Disabilities Act.  Here is the Court's reasoning for rejecting that argument:

It is true that the ADA’s prohibition on retaliation, like Oregon’s prohibition on peyote use [in Smith], is a valid and neutral law of general applicability. But a church’s selection of its ministers is unlike an individual’s ingestion of peyote. Smith involved government regulation of only outward physical acts. The present case, in contrast, concerns government interference with an internal church decision that affects the faith and mission of the church itself. See id., at 877 (distinguishing the government’s regulation of“physical acts” from its “lend[ing] its power to one or the other side in controversies over religious authority or dogma”). The contention that Smith forecloses recognition of a ministerial exception rooted in the Religion Clauses has no merit.

If Smith does not bar the ministerial exception because that exception relates to "an internal church decision that affects the faith and mission of the church itself," it certainly seems reasonable to conclude that Smith also does not bar a pulpit exception, at least if a pulpit-delivered endorsement of a candidate is religiously motivated and communicated to the congregation as part of the minister's role in teaching them how to faithfully live out their beliefs.  That this would be the case for many if not most ministers who chose to deliver such a message from the pulpit seems likely, for reasons detailed in my article.  The Supreme Court in Hosanna-Tabor appears to have provided solid grounds for arguing that the Free Exercise Clause requires such a pulpit exception.

LHM

 

Supreme Court Upholds "Ministerial Exception"

Yesterday, the Supreme Court decided Hosanna-Tabor Lutheran Church and School v. Equal Employment Opportunity Commission.  The Court affirmed that religious organizations benefit from a “ministerial exception” to employment discrimination laws.

Commenting on the decision, the NonProfit Times explained that

The unanimous ruling culminated a case in which a woman sued Hosanna-Tabor Evangelical Lutheran Church and School in Redford, Mich. The woman, Cheryl Perich, said she was fired for pursuing an employment-discrimination claim, based on her having narcolepsy. Hosanna-Tabor didn’t deny the facts, but responded that it fired Perich for violating religious doctrine by taking the case to court rather than trying to settle it within the church.

The High Court, in a unanimous decision written by Chief Justice John Roberts, affirmed religious entities’ right to choose who will preach their beliefs, teach their faith and carry out their mission.

 The Reporter, the official newspaper of the Lutheran Church -- Missouri Synod, gave more details:

In the case, Hosanna-Tabor Evangelical Lutheran Church and School v. Equal Employment Opportunity Commission, et al.,a former commissioned-minister (teacher) at the now-closed Hosanna-Tabor school sued the school after she was dismissed in 2005 for "insubordination and disruptive conduct in violation of church teaching," according to Hosanna-Tabor's Petition for Certiorari.
 
The fourth-grade teacher, Cheryl Perich, sued the congregation for disability discrimination, claiming the church rescinded her call as a commissioned minister because of her narcolepsy, a sleep disorder that typically causes excessive daytime sleepiness.
 
A federal district court dismissed the case based on the "ministerial exception," a First Amendment doctrine that bars lawsuits that would interfere in the relationship between a religious organization and employees who perform religious functions.
 
But the U.S. Court of Appeals for the Sixth Circuit later reversed the district court and ruled in favor of Perich, holding that the teacher had a predominantly "secular" role because she spent more time each day teaching secular subjects than religious ones.

In his opinion, Chief Justice John G. Roberts said that, in light of the First Amendment's guarantee of the free exercise of religion, "it is impermissible for the government to contradict a church's determination of who can act as its ministers."
 
Justice Roberts continued:

Since the passage of Title VII of the Civil Rights Act of 1964 and other employment discrimination laws, the Courts of Appeals have uniformly recognized the existence of a 'ministerial exception,' grounded in the First Amendment, that precludes the application of such legislation to claims concerning the employment relationship between a religious institution and its ministers. The Court agrees that there is such a ministerial exception.

As a minister of religion, I am delighted with the Court's decision.  In fact, I agree with the writer at the North American Religious Liberty Association who opined that this was "likely the most important religious liberty case to come down in the past two decades." 

VEJ
   

Montana Supreme Court Upholds Century-Old Law Banning Political Spending by Corporations

In a decision certain to intrigue nonprofit practitioners and scholars alike, the Montana Supreme Court upheld its century-old ban on corporate political expenditures (the state's 1912 Corrupt Practices Act), applying, yet ultimately ruling contrary to, the United States Supreme Court's decision in Citizens United v. F.E.C. (see prior blog postings on this seminal case here and here).   Plaintiffs sought to overturn the ban.  One of the plaintiffs, Western Tradition Partnership, now named American Tradition Partnership, is a "501(c)(4) grassroots lobbying organization dedicated to fighting environmental extremism and promoting responsible development and management of land, water, and natural resources in the Rocky Mountain West and across the United States." In its decision, the Montana Supreme Court, via a 5-justice majority opinion, concluded that the State has always had and continues to have a compelling interest in regulating corporate spending on political campaigns because of the state's history of past political corruption (the famed "Copper Kings").  In the conclusion of its opinion, the majority stated:

Citizens United does not compel a conclusion that Montana's law prohibiting independent political expenditures by a corporation related to a candidate is unconstitutional.  Rather, applying the principles enunicated in Citizens United, it is clear that Montana has a compelling interest to impose the challenged rationally-tailored statutory restrictions.

The majority clearly stated that corporations can speak through their own political action committees, which are both easy to form and to whom contributions are easy to make under Montana law, unlike the federal law PACs at issue in Citizens United.    

The two dissenting justices both wrote that Montana's outright ban on corporate political expenditures violates the First Amendment, as enunciated in Citizens United. 

See related articles on this decision in the L.A. Times, The Wall Street Journal, and Great Falls Tribune. 

(Hat Tip:  The Nonprofit Quarterly)

NAM

EOs & Political Activities: Just Can't Seem to Get Their Day in Court (9th Circuit & 11th Circuit)

In the past six months, two prominent cases involving tax-exempt organizations challenging the IRS with respect to political activities have quietly died, although at least one has a faint hope of revival. Together, they reinforce the impression that the IRS is carefully avoiding litigating close or even semi-close cases involving the limitations on political activities for tax-exempt organizations.

Last June, the U.S. Court of Appeals for the 9th Circuit rejected the appeal of Catholic Answers from a district court's dismissal of its tax refund suit for mootness.  Catholic Answers was challenging the IRS' decision to revoke its tax-exempt status under IRC § 501(c)(3) on the grounds that the standard for what constitutes prohibited political campaign intervention for C3 groups is void for vagueness.  Catholic Answers has filed a petition seeking certiorari with the Supreme Court, but I believe the chances of success for that petition are slim to none for the reasons stated here.

More recently, the Christian Coalition of Florida (remember them?  so 1990s) lost its appeal to the U.S. Court of Appeals for the 11th Circuit challenging the dismissal of its tax refund suit for mootness after the IRS refunded the disputed taxes.  The IRS had imposed those taxes based on the assertion that the organization did not qualify for IRC § 501(c)(4) because of excessive political activity.  Here is the court's summary of the case:

    Christian Coalition of Fla. (“CC-FL”) appeals the district court’s dismissal of its tax refund suit for mootness. Shortly after the litigation began, the Internal Revenue Service (“IRS”) refunded the disputed taxes in full. CC-FL claims, however, that a live controversy still exists because it is also seeking declaratory and injunctive relief in order to obtain a favorable determination of its tax-exempt status. CC-FL claims that the failure of the IRS to recognize CC-FL as a tax-exempt organization has collateral consequences that prevent the tax refund from rendering this case moot.
    After thorough review, we AFFIRM the judgment of the district court. Filing a claim for a tax refund suit is not simply a procedural hurdle that, once leapt over, allows a party to seek other forward-looking relief against the IRS after the refund has been granted. Without a live refund claim, there is no way to distinguish this case from the kind of pre-enforcement suits that Congress, through the Anti-Injunction Act and the federal tax exemption to the Declaratory Judgment Act, has expressly forbidden taxpayers from bringing.

LHM