A Texas federal trial court recently rejected Freedom Path’s challenge to the IRS’s multi-factor “facts and circumstances” test for a nonprofit’s politically-tinged advocacy speech as not unconstitutionally too vague or otherwise legally problematic. The court’s adverse decision deals a setback for free speech interests affected by the IRS’s constitutionally dubious test, as contained in its Revenue Ruling 2004-6.
The Road Thus Far
The case’s background is detailed in our firm’s “Freedom Path” blogs posted on December 2016 and May 2014. In a nutshell, Freedom Path is a Section 501(c)(4) tax-exempt social welfare organization that engages in “issue advocacy” – that is, communications intended to educate people about a wide variety of public policy issues. Some Section 501(c)(3) organizations also engage in issue advocacy, addressing public policy issues as part of their mission. (E.g., pro-life advocacy against abortion, environmental advocacy regarding clean water, advocacy regarding sexuality-related issues.)
For both types of tax-exempt organizations, questions of legal permissibility may arise when these communications take on a political hue. For Section 501(c)(3) organizations, an absolute bar exists against political campaign activity and only limited lobbying is allowed. Section 501(c)(4) organizations may engage in only limited political campaign activity, but they may engage in unlimited lobbying activity.
The IRS (“Service”) previously rejected Freedom Path’s tax-exempt application because it deemed the organization’s advocacy speech too political. In reaching its determination, the IRS utilized the agency’s “facts and circumstances” test, concluding Freedom Path did not qualify for tax-exempt status. The Service’s rejection followed extensive IRS delays and voluminous requests for additional information, totaling two and half years from the Freedom Path’s initial 2011 application. After the 2013 IRS determination, Freedom Path sued the Service.
On Summary Judgment
Through a motion for summary judgment, Freedom Path challenged the IRS’s “facts and circumstances” test as contained in Revenue Ruling 2004-6. The organization argued the test is too vague, that it calls for improper subjective evaluation of an organization’s communications, and that impermissibly burdens free speech through its chilling effect and allowance for illegal viewpoint discrimination.  In its ruling, the Texas court focused on Freedom Path’s motion as a “facial challenge” and not as “an applied” challenge. A facial challenge asserts the “facts and circumstances test” to be theoretically vague and otherwise constitutionally problematic, regardless of whom it applies. By contrast, an “as applied” challenge call for evaluation of whether the test is unconstitutional specifically with regard to Freedom Path’s own circumstances (and thus is typically of more limited precedential value).
Within this limited framework, the court rejected Freedom Path’s arguments. The court concluded instead that the IRS test adequately provides a person of ordinary intelligence with fair notice of prohibited active and otherwise does not allow for discriminatory enforcement. The court further rejected Freedom Path’s argument that the IRS’s “facts and circumstances” test invites unlawful viewpoint discrimination, which would allow the IRS to harass and delay disfavored groups (despite the fact that exactly such delay and apparent harassment already occurred through Freedom Path’s lengthy odyssey with the IRS application process). The court also rebuffed Freedom Path’s argument that the IRS test allows improper subjective evaluation of an organization’s intent, timing of communications, and context of communications, as impermissible factors for determining whether the organization’s speech amounts to permissible issue advocacy or impermissible political campaign speech. In so ruling, the court accepted the government’s argument that a lower constitutional standard is acceptable within the present civil tax context, rather than a criminal context, without substantial interference with speech.
Through this distinction, the court thus dismissed the strong protections afforded to speech and related First Amendment interest, as recognized by the U.S. Supreme Court in the landmark cases of Federal Election Commission v. Wisconsin Right to Life (2007) (“WRTL”) and Citizens United v. Federal Election Commission (2010). Both cases addressed nonprofit issue advocacy within the context of closely related election activities. In WRTL, the Court directed that the proper standard for evaluating politically-tinged issue advocacy speech “must eschew the open-ended rough-and-tumble of factors, which invites complex argument in a trial court and a virtually inevitable appeal. . .giv[ing] the benefit of the any doubt to protecting rather than stifling speech.” Citizens United similarly favored free speech over a stifling multi-factor enforcement regime.
Despite the clear precedent rejecting amorphous restrictions on free speech, the Texas court deferred to the government’s position that a nonprofit’s speech is not per se impermissibly and unconstitutionally burdened by the IRS’s inscrutable test. According to the court, the test merely “regulates whether expenditures for certain types of speech will be subsidized through their treatment for federal income tax purposes.” In doing so, the court distinguished the civil context, which is normally the arena for tax-exempt organizations’ initial qualification and continued operation under the IRS’s purview, rather than the criminal context at issue in WRTL. The court additionally relied on the subsidy theory of federal tax exemption, which many scholars and tax practitioners have questioned. (See, e.g., P. Hackney, What We Talk About When We Talk About Tax Exemption)
Disappointing Rejection of Profound First Amendment Freedoms
Such distinction between civil and criminal context may be true as a matter of legal precedents, but it is nonetheless seriously disappointing because of the consequently weaker judicial value ascribed here to free speech protections under the First Amendment. In short, the court was willing to permit constitutionally questionable limitations on speech, through the IRS’s vague “facts and circumstances” as the price tag for nonprofit tax-exempt status.
Such approach files in the face of our country’s enormous respect for free speech as a bedrock constitutional priority and regardless of whether the context is civil or criminal. As the U.S. Supreme Court directed in WRTL, “Where the First Amendment is implicated, the tie goes to the speaker, not the censor.” And as the Court much earlier observed, “Freedom of speech plays a fundamental role in a democracy; as this Court has said, freedom of thought and speech ‘is the matrix, the indispensable condition, of nearly every form of freedom.’” (Federal Election Commission v. Mass. Citizens for Life, Inc., (1986)). As the Court likewise recognized in Citizens United, the First Amendment prohibits the government from unduly interfering in the ‘marketplace of ideas,” particularly since “[s]peech is an essential mechanism of democracy, for it is the means to hold officials accountable to the people.” Thus any test regarding politically oriented speech should “reflect our profound national commitment to the principle that debate on public issues should be uninhibited, robust, and wide-open.” (WRTL).
What happens next? Freedom Path’s steadfast challenge to the IRS’s “facts and circumstances” test surely will continue. Freedom Path may choose to appeal the trial court’s adverse summary judgment ruling onward to the federal Fifth Circuit Court of Appeals. Alternatively, or in addition, Freedom Path may seek to develop the evidentiary record further, then assert its arguments again based on an “as applied” challenge to show that the IRS test unconstitutionally burdens its First Amendment rights through vague, subjective, discriminatory, and otherwise legally problematic application to in application to Freedom Path’s specific tax-exempt activities. Regardless, the recent ruling by the Texas Court demonstrates a troubling failure to uphold First Amendment freedoms – not just for nonprofit organizations but for others who enjoy speech-related freedoms under the First Amendment too.
 Revenue Ruling 2004-6 requires that “[a]ll the facts and circumstances must be considered . . . . 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.”