A newly filed lawsuit by Freedom Path, Inc. squarely pits the First Amendment’s free speech protections against the IRS’s questionable “facts and circumstances” test for evaluating politically-tinged issue advocacy activities of tax-exempt organizations. Freedom Path is a conservative section 501(c)(4) social welfare organization that engages in issue advocacy activities affecting politics. In its lawsuit filed April 28, 2014, against former IRS official Lois Lerner, other “unknown” IRS officials, and the IRS itself, Freedom Path claims it was unfairly targeted. Freedom Path’s complaint describes unreasonable IRS delays in processing its tax-exemption application, unwarranted requests for additional information, and illegal release of confidential information by IRS officials to the media.
As Freedom Path asserts in its complaint, “this lawsuit presents a rare opportunity to challenge Defendant IRS’s unconstitutionally vague and ambiguous ‘facts and circumstances’ test used to analyze [Freedom Path’s] activities, a test which is in direct conflict with the U.S. Supreme Court’s clear guidelines relating to issue advocacy and campaign speech in Federal Election Commission v. Wisconsin Right to Life, Inc.” (WRTL). The significance of Freedom Path’s lawsuit is that it seeks to enforce the rule of law – that is, to make the IRS obey the US Supreme Court’s landmark decision as the supreme law of the land.
A. Freedom Path’s Constitutional Journey
Freedom Path’s odyssey began in March 2011, when it applied to the IRS for recognition as a section 501(c)(4) social welfare organization. Freedom Path then waited for nearly one full year, with no substantive response from the IRS.
According to its complaint, Freedom Path next received “voluminous and probing requests for additional information” from the IRS in February 2012. Despite serious problems with the requests, Freedom Path responded with comprehensive answers on June 3, 2012. The IRS then waited until February 2013 to follow up. In the meantime, the IRS allegedly disclosed Freedom Path’s confidential tax information to an investigative news organization called ProPublica, which then publicly disclosed it.
The IRS questioning continued, including an offer of expedited processing in exchange for Freedom Path surrendering some of its free speech rights. Freedom Path declined. Finally in September 2013, two and a half years after Freedom Path’s initial application, the IRS notified Freedom Path that its speech was too political for tax exemption and not constitutionally protected under its “facts and circumstances” test for analyzing politically tinged issue advocacy.
B. A Brief Primer on Nonprofit Issue Advocacy
To understand the heart of the constitutional problem, a few basics are in order. As an initial matter, both section 501(c)(3) public charities and section 501(c)(4) social welfare organizations may engage in “issue advocacy” – that is, activities intended to educate people about a wide variety of public policy issues. Such groups may advocate issues even if they are politically tinged (e.g., economics, abortion, environmental issues) – without jeopardizing their tax-exempt status. Both types of organizations, however, are constrained as to their levels of engagement in political campaign activities and lobbying.
Thus, a critical question is often whether politically tinged speech or other activities bumps up against the applicable political activity limits. Another important issue is whether an organization’s speech or expressive activities are otherwise consistent with tax-exempt status (e.g., not promoting illegal activity, sufficiently “educational”).
With respect to political limitations on issue advocacy, the IRS has made clear that it will look at “all the facts and circumstances of a case,” and evaluate them in its own discretion. (See Rev. Rul. 2007-41; Rev. Rul. 2004-6.) Such factors include the following:
- Whether a statement expresses approval or disapproval of a candidate’s positions or actions;
- Whether a statement is delivered close in time to an election;
- Whether the issue addressed is one that has distinguished the candidate;
- Whether the communication is part of an ongoing series of communications by the organization on the same issue;
- Whether the communication’s timing is related to a non-electoral event; and
- Other factors, as the IRS may determine in its discretion.
The IRS has provided no guidance as to how the factors should be weighted.
Notably, the IRS is supposed to "maintain a position of disinterested neutrality" in examining a tax-exempt applicant's issue advocacy activities (IRS Rev. Rul. 86-43). But the IRS has not demonstrated the competency required for its discretion (whether due to internal IRS inconsistencies, political bias, or other deficiencies). And the price tag is startlingly high for operating differently than the IRS may later determine in its discretion is permissible – namely, rejection or invalidation of favored tax-exempt status.
C. The Unconstitutionality of the IRS’s Facts and Circumstances Test
As the US Supreme Court ruled in Federal Election Commission v. Massachusetts Citizens for Life, Inc. (1986), “[w]here at all possible, government must curtail speech only to the degree necessary to meet the particular problem at hand.” This is because, as the Court has repeatedly recognized, freedom for politically related speech is part of the bedrock of our country’s democratic system. Consequently, as the Court recognized in WRTL, any test regarding politically oriented speech thus should “reflect[] our profound national commitment to the principles that debate on public issues should be uninhibited, robust, and wide-open.”
With this deeply compelling foundation, the Court has insisted that only an objective test regarding politically-related issue advocacy is appropriate, with “the First Amendment requir[ing] us to err on the side of protecting political speech rather than suppressing it.” The focus is thus to be on the substance of the communication at issue, not “amorphous considerations of intent and effect.” (WRTL). Notably, the WRTL Court specifically rejected “the open-ended rough-and-tumble of factors that could invite complex arguments,” and further rejected context-related factors such as a speech’s timing in relation to an election.
In stark contrast, and as Freedom Path’s lawsuit makes clear, the IRS’s facts and circumstances test violates the First Amendment because it is too vague, allows content-based, subjective scrutiny of otherwise protected speech, and directly violates the above Supreme Court prohibitions. In WTRL, the Supreme Court held that only an objective test affirming broad freedom of expression is appropriate, with “the tie going to the speaker, not the censor.” The IRS has ignored such binding authority, instead playing the role of censor.
In November 2013, the IRS continued this trajectory of unconstitutional scrutiny through its proposed regulations for section 501(c)(4) social welfare organizations. The regulations were ostensibly promulgated to bring much-needed “clarity” into the area of politically related speech. However, an enormous chorus of critics from both sides of the aisle has resoundingly chimed in to pronounce the proposed regulations as defective, constitutionally and otherwise. In particular, the regulations do not give even a nod to WRTL, to either affirm free speech values or to distinguish the proposed rules as purportedly constitutionally valid.
D. Judicial Relief in Sight?
It is high time for a constitutional challenge like Freedom Path’s lawsuit. The IRS currently applies a convoluted and ill-conceived test for issue advocacy, to determine whether such expressions are legitimately within the purview of qualified tax-exempt activities for 501(c)(3) and 501(c)(4) organizations or beyond the pale, therefore warranting disqualification of tax-exempt status. By using inappropriate factors under a vague “facts and circumstances” test, IRS representatives are allowed to engage in content-based scrutiny that chills speech, creates confusion, and otherwise allows for First Amendment violations.
Freedom Path is right: the U.S. Constitution clearly does not allow the degree of vagueness or subjective scrutiny squarely rejected by the US Supreme Court but currently allowed by the IRS. Neither Freedom Path nor any other tax-exempt applicant should have to wait two and a half years on the IRS and be subjected to undue questioning and illegal disclosure of confidential information, only to be confronted with a bureaucratic application of an unconstitutional test for its politically related speech. May the court system bring justice and clarity out of this unconstitutional morass.
To read Freedom Path’s complaint, please click here.
