Wednesday, July 1, 2020

Agency for International Development and Corporate Separateness

This week, the Supreme Court released a couple opinions of interest in the nonprofit world. The first was Agency for International Development. 

Background on the case: in 2003, Congress allocated billions of dollars to U.S. and foreign NGOs to combat HIV/AIDS abroad. That money was conditioned, however, on an organization having an explicit policy opposing prostitution and sex trafficking.

Some organizations that would otherwise qualify for these grants have found that a neutral stance toward prostitution is more helpful in their work, and oppose the policy requirement. Some U.S. NGOs filed suit and, in 2013, the Supreme Court held that the requiring that an organization have an explicit policy against prostitution to qualify for grant money violated the First Amendment. As a result, U.S. NGOs do not have to have an explicit policy opposing prostitution and sex trafficking.

But that left foreign NGOs. And it's worth noting that at least some of the foreign NGOs pursing this grant money are affiliated with U.S. NGOs that aren't subject to the policy requirement

In Agency for International Development, the Supreme Court held that the policy requirement is valid with respect to non-U.S. organizations. It based that conclusion on two grounds:

  1. Constitutional rights, including the First Amendment guarantee of freedom of speech does not apply to foreign citizens who are not on U.S. territory.
  2. Separately incorporated entities are separate legal persons.

It follows, according to the majority, that foreign NGOs operating outside of the U.S. do not enjoy the First Amendment speech rights that domestic NGOs enjoy. It did not endorse the plaintiffs' arguments that speech by foreign affiliates could be attributed to the domestic entity, nor that the 2013 decision encompassed both domestic and related foreign entities.

On first blush, this strikes me as the correct decision. In both the tax world and the business law world, separate entities are, in fact, separate and are treated as such. NGOs that object to this ruling--and object to having an explicit policy opposing prostitution and sex trafficking--could dissolve their foreign affiliate and instead operate through a branch of the domestic entity. (It may not be that easy--presumably there's a reason the NGO chose to have a separate entity, and using the domestic entity may create regulatory problems or increase liability risk or something, but as a technical matter, this is an easy problem to solve.)

The dissent, however, raises an important hole in the majority's opinion. While it is true that U.S. law generally treats incorporation as sacrosanct, and recognizes the separate personhood of separate entities, it doesn't always. In Regan v. Taxation With Representation, the Appellee applied for tax exemption as a 501(c)(3) organization. The IRS determined that a substantial part of its activities would involve lobbying, which was impermissible under 501(c)(3). TWR argued that the limitation on lobbying was impermissible under the First and Fifth Amendments. The Supreme Court determined that the limitations were permissible because TWR couldl do its lobbying through an affiliated 501(c)(4) organization. (I'm indebted here to Phil Hackney, who flagged this to me before I'd read the opinion.)

In that case, then, the Supreme Court did impute the speech from one entity to another to save a statutory scheme. If this case represents a shift in its thinking about affiliated nonprofits, though, this case could significantly impact the world of tax-exempt organizations. If the Supreme Court really means that it won't impute speech from one entity to another, an affiliated 501(c)(4) will presumably not overcome the constitutional deficiencies 501(c)(3) imposes on entities.

In any event, it will be interesting to see what the impact of this case is in the future.

Samuel D. Brunson

https://lawprofessors.typepad.com/nonprofit/2020/07/agency-for-international-development-and-corporate-separateness.html

Current Affairs, Federal – Judicial | Permalink

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