Freedom Path’s journey toward Section 501(c)(4) tax-exempt recognition met another roadblock last month. The federal Fifth Circuit Court of Appeals rejected Freedom Path’s challenge to the IRS’s constitutionally dubious “facts and circumstances test” for determining whether educational issue advocacy on a variety of public policy issues crosses the line into excessive political campaign advocacy. Freedom Path has sought to invalidate the IRS’s Revenue Ruling 2004-06 regarding politically-tinged speech on grounds of vagueness, subjective evaluation of an organization’s communications, impermissible free speech deterrence, and illegal viewpoint discrimination by the IRS. While such arguments seem compelling, the Fifth Circuit instead focused on the preliminary technical “standing” question.
The Long Path from 2011 to 2019
Freedom Path first applied for recognition as a 501(c)(4) social welfare, or “action” organization in March 2011. In September 2013, after numerous requests for additional information from Freedom Path, the IRS sent Freedom Path a proposed denial of its application based on the Service’s assessment that Freedom Path was not operated “exclusively for the promotion of social welfare” – i.e., it was too political. The IRS relied on Revenue Ruling 2004-6 “concerning public advocacy activities conducted by social welfare organizations” to reach this conclusion.
Freedom Path then sued the IRS, claiming the Service was discriminating against organizations with conservative political viewpoints like itself, as evidenced by the Service’s unreasonable requests for information and delay in processing Freedom Path’s application. More specifically, Freedom Path sought a declaratory judgment that Rev. Ruling 2004-6’s “facts and circumstances test” was facially unconstitutional and chilled its First Amendment rights. In other words, Freedom Path contended that this test is unconstitutional on its face, regardless of specific facts as applied to Freedom Path’s or any other organization’s circumstances. Freedom Path’s previous legal efforts are detailed in our prior blogs as noted in our August 2017 blog.
What’s Wrong with the IRS’s Revenue Ruling 2004-06
Rev. Ruling 2004-6 makes clear that the IRS is to look at “all the facts and circumstances of a case” regarding an organization’s communications and evaluate them in its own discretion.[1] In stark contrast, the US Supreme Court has directed that “[w]here at all possible, government must curtail speech only to the degree necessary to meet the particular problem at hand.” Federal Election Commission v. Massachusetts Citizens for Life, Inc. (1986). This is because freedom for politically related speech is part of the bedrock of our country’s democratic system. Consequently, any test regarding politically oriented speech should “reflect[] our profound national commitment to the principles that debate on public issues should be uninhibited, robust, and wide-open.” Indeed, “[w]here the First Amendment is implicated, the tie goes to the speaker, not the censor.” Federal Election Commission v. Wisconsin Right to Life, Inc. (2007).
The Supreme Court has therefore focused on an objective test regarding politically-related issue advocacy as constitutionally appropriate. But the “facts and circumstances” test set forth in Rev. Ruling 2004-6 falls short of that objective standard, with several factors capable of subjective interpretation.
First, Taxpayer Standing for a Facial Challenge
Within the procedural context of Freedom Path’s lawsuit, the parties agreed to focus only on Freedom Path’s facial challenge to Rev. Ruling 2004-6 as the sole issue for now. Freedom Path’s “as applied” challenge (that is, whether the IRS test would be unconstitutional as applied to Freedom Path’s own circumstances) was dismissed “without prejudice,” leaving such issue for later determination if needed. An invalidation of Rev. Ruling 2004-6 as facially unconstitutional would have a much broader legal impact than an “as applied” challenge, since the “as applied” legal analysis would technically apply only to Freedom Path.
On this facial challenge, the trial court ruled against Freedom Path in December 2017. The Fifth Circuit then affirmed on appeal, tossing out Freedom Path’s case on the grounds of “standing” with a surprisingly brief legal analysis, and without addressing the underlying question of Rev. Ruling’s constitutionality.
Federal courts have been known to guard their jurisdiction very carefully, sometimes undertaking a burdensome analysis of whether a litigant and case or controversy are rightly “standing” before the court. To meet the “standing” test, a plaintiff must satisfy three requirements. First, the Plaintiff must suffer an injury, or more specifically an “injury in fact.” The supposed injury cannot be too speculative or remote but must be actual. Second, the injury must be fairly traceable to the action or law being challenged. In other words, a Plaintiff must show that its injury is related to its claim. Third, the injury must be redressable by the court. That is, a favorable ruling by the court must serve to remove the injury. Although easy to articulate, in practice these three requirements can often be difficult to meet.
Freedom Path has claimed all along that Revenue Ruling 2004-6 unconstitutionally chills its speech, effectively discourages and deters speech about public policy issues with political overtones through the overbroad and vague “facts and circumstances” test. These deficiencies make it impossible for Freedom Path to know how the IRS will characterize their activities. In other words, if the IRS considers Freedom Path’s actions to constitute “political campaign activity” within its own subjective interpretation, then Freedom Path will face taxation on its related expenditure. Such potentially adverse result may be objectionable for Freedom Path, but not necessarily a legitimate basis for its standing.
Indeed, according to the Fifth Circuit, the “standing” problem here is that Section 501(c)(4) organizations like Freedom Path are taxed on the lesser of the organization’s expenditures for political campaign activity or its net investment income, based on Section 527(f)(1) of the Tax Code. In this case, Freedom Path has had no investment income. Consequently, Freedom Path has no injury because it has no resulting tax burden and therefore, as the appellate court determined, it fails to satisfy the first requirement for standing.
No Tax Liability, So No Standing
“But wait”, Freedom Path argued. “Our speech is chilled because of the vagueness of this ruling.” “And the IRS even cited Rev. Ruling 2004-6 in our denial letter.” “Not so fast,” replied the Court. “You are making a facial challenge.” That means that Freedom Path must show that, on its face, the Revenue Ruling works a constitutional injury. And perhaps that may be enough for standing.
On its face, however, Rev. Ruling 2004-6 does not directly address whether or when an organization’s 501(c)(4) tax-exempt status will be recognized. Rather, the ostensible purpose of Rev. Ruling 2004-6 is to determine potential tax liability, with the subject organization’s tax-exempt status not in question. In Freedom Path’s case the IRS did indeed rely on Rev. Ruling 2004-6 in reviewing Freedom Path’s tax-exempt application. However, that is an application of the revenue ruling to Freedom Path’s specific circumstances – in other words, an “as applied” challenge – but the case decided by the Fifth Circuit involved only a facial challenge.
That facial challenge to Rev. Ruling 2004-6 fails, the Fifth Circuit said, because – on its face – the purpose of the revenue ruling is to determine tax liability. Freedom Path does not have standing to make a facial challenge to the revenue ruling because it does not owe any taxes.
To win a facial challenge, Freedom Path would have had to show that the law was invalid because of how it affected Freedom Path’s tax liability. Since Freedom Path has no investment income, no vagueness or overbreadth in Rev. Ruling 2004-6 could affect their tax liability because whatever expenditures they made for “political campaign advocacy” would be negated by its lack of investment income. Since Freedom Path has no tax liability, it has no injury. And since Freedom Path has no injury, it has no standing.
But What About Free Speech?
The Court’s standing-based ruling may be technically correct, but it essentially pushes the argument to another day in court for Freedom Path. Freedom Path may well come back swinging, and this time with an as-applied challenge. That claim should have significant merit, once it is properly before a court, and depending on Freedom Path’s specific speech at issue.
Generally speaking, the IRS’s facts and circumstances test within Rev. Ruling 2004-6 is vague, allows content-based, subjective scrutiny of otherwise protected speech, and seems to violate Supreme Court prohibitions against restriction of political speech.
As the Court instructed in Wisconsin Right to Life, only an objective test affirming broad freedom of expression is appropriate for tax-exempt organizations: “the First Amendment requir[es] us to err on the side of protecting political speech rather than suppressing it,” and the focus of any free speech analysis should be the substance of the communication at issue, not “amorphous considerations of intent and effect” as Rev. Ruling 2004-6 sets forth. We expect Freedom Path’s free speech journey to continue, hopefully ending on more welcoming shores of Rev. Ruling’s 2004-6’s constitutional evaluation.
[1] Factors tending to show that a communication is a political campaign activity “include, but are not limited to, the following:
a) The communication identifies a candidate for public office;
b) The timing of the communication coincides with an electoral campaign;
c) The communication targets voters in a particular election;
d) The communication identifies that candidate’s position on the public policy issue that is the subject of the communication;
e) The position of the candidate on the public policy issue has been raised as distinguishing the candidate from others in the campaign, either in the communication itself or in other public communications; and
f) The communication is not part of an ongoing series of substantially similar advocacy communications by the organization on the same issue.”
“[F]actors tending to show that a communication is not a political campaign activity . . . include, but are not limited to, the following:
a) The absence of any one or more of the factors listed in a) through f) above;
b) The communication identifies specific legislation, or a specific event outside the control of the organization, that the organization hopes to influence;
c) The timing of the communication coincides with a specific event outside the control of the organization that the organization hopes to influence, such as a legislative vote or other major legislative action (for example, a hearing before a legislative committee on the issue that is the subject of the communication);
d) The communication identifies the candidate solely as a government official who is in a position to act on the public policy issue in connection with the specific event (such as a legislator who is eligible to vote on the legislation); and
e) The communication identifies the candidate solely in the list of key or principal sponsors of the legislation that is the subject of the communication.
Rev. Ruling 2004-6.
