Freedom Path's Continued Journey: Challenging the IRS' Dubious "Facts and Circumstances" Political Test

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When is a tax-exempt organization too political? Freedom Path is a nonprofit that has repeatedly sought to challenge the IRS’ multi-factor “facts and circumstances” test for deciding that question, particularly with respect to politically-oriented educational issue advocacy. Throughout varying court challenges, Freedom Path has asserted that it is properly organized as a Section 501(c)(4) social welfare organization and entitled to engage in constitutional free speech activities that do not cross over the political line for such tax-exempt status. The IRS, on the other hand, has rejected such argument per its Revenue Ruling 2004-6, and has won so far. Who is right? Does IRS Revenue Ruling 2004-6 pass constitutional muster?

This article traces Freedom Path’s lengthy journey in seeking to establish itself as a Section 501(c)(4) organization, including an analysis of the IRS’ problematic “facts and circumstances” test and Freedom Path’s most recent attempt to strike down the test in its recently-filed lawsuit in the U.S. District Court for the District of Columbia.

A. The Long Litigation Journey

Freedom Path is organized to promote social welfare, specifically “to promote and defend the causes that recognize the individual rights and liberties guaranteed to all Americans.” Freedom Path began its legal journey in 2011, when it applied to the IRS for tax-exempt recognition under Section 501(c)(4) of the Internal Revenue Code. IRS regulations describe social welfare organizations as those “primarily engaged in promoting in some way the common good and general welfare of the people of the community.” (Such organizations are distinguished from Section 501(c)(3) organizations in that they are not primarily “charitable, religious, or educational” but instead promote the social welfare more generally.)

After two and a half years, Freedom Path learned that the IRS had rejected its application on the grounds that its advocacy speech was too political under the IRS’ facts and circumstances test. Freedom Path then sued the IRS and its officials in April 2014 in Texas federal district court.

In such lawsuit, Freedom Path claims it was unfairly targeted. Freedom Path’s complaint described 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. Freedom Path further asserted a constitutional challenge to the IRS’ facts and circumstances test. (See our law firm’s blogs posted on May 9, 2014 and December 22, 2016, for more background information.)

The Texas district court rejected Freedom Path’s arguments, ruling instead that the IRS’ multi-factor “facts and circumstances” test (as more set forth below) is not unconstitutionally vague or otherwise legally problematic. Within the context of Freedom Path’s facial challenge (i.e., that the IRS test is constitutionally void on its face, not necessarily just as applied to Freedom Path), the court concluded instead that the IRS’ test adequately provides a person of ordinary intelligence with fair notice of prohibited activities and otherwise does not allow for discriminatory enforcement. The court further rejected Freedom Path’s argument that the IRS 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 interests. (For additional analysis of this decision, please see our August 23, 2017 blog.)

Onward to appeal. The federal Fifth Circuit Court of Appeals dealt Freedom Path quite a blow, ruling on technical grounds that Freedom Path lacked the requisite “standing” to assert its constitutional objections to the IRS test. As the court ruled, 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 had no investment income. Consequently, Freedom Path had 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. (For additional information about this decision, please see our February 12, 2019 blog.)

B. The IRS’ Facts and Circumstances Test

To understand the heart of Freedom Path’s constitutional challenge, 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 the permitted maximum levels of engagement in political campaign activities and lobbying. Further, if an organization that purports to be a Section 501(c)(4) organization focusing on “issue advocacy” but whose primary purpose is determined to be political campaign activity, including influencing elections, the IRS will instead characterize such an organization as a Section 527 political action committee (PAC), subject to extensive donor disclosure requirements, contribution limits, and potential taxes. The critical resulting question is thus whether politically tinged speech or other activities bump up against the applicable political activity limits, perhaps even pushing an organization over the line into a Section 527 PAC tax classification.

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, however, as to how the factors should be weighted. 

Further, 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). The price tag is startlingly high for operating in a way that the IRS later determines is impermissible – namely, rejection or invalidation of tax-exempt status.

As Freedom Path has continually asserted, the IRS’ facts and circumstances test directly conflicts with the U.S. Supreme Court’s clear guidelines relating to issue advocacy and campaign speech, as set forth in its 2007 Federal Election Commission v. Wisconsin Right to Life, Inc. decision (WRTL). In other words, Freedom Path wants the IRS to obey the Court’s landmark decision as the supreme law of the land.

As the US Supreme Court ruled in an earlier case, 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’ facts and circumstances test violates the above Supreme Court prohibitions because it is too vague and allows content-based, subjective scrutiny of otherwise protected speech. 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 with a remarkably free hand.

C. Will Freedom Path’s Persistence Pay Off?

In its new complaint, Freedom Path seeks a declaratory judgment that it is tax-exempt under §501(c)(4), a judicial recognition that the IRS’ facts and circumstances test is invalid, a declaration that the IRS test is constitutionally void for vagueness (both facially and as applied to its case), and a declaration that the IRS test is constitutionally overbroad in violation of the First Amendment. Freedom Path also asserts numerous violations by the IRS of the Administrative Procedure Act (APA) based on the IRS’ unreasonable delay, abuse of discretion, and arbitrary and capricious denial of Freedom Path’s application dating back to 2011. By filing in federal court within the District of Columbia, and thereby with a potential appeal to the highly influential federal D.C. Circuit, Freedom Path has raised the stakes and may likely receive a more definitive judicial ruling on the facts and circumstances test.

In seeking to strike down the IRS test, Freedom Path relies on the Supreme Court’s WRTL and 2010 Citizens United v. FEC decisions. Under these precedents, Freedom Path highlights four problems with the IRS facts and circumstances test:

  1. The IRS factor of whether an electoral communication coincides with a campaign is irrelevant in determining whether it is issue advocacy or political campaign activity, as recognized in WRTL;
  2. The IRS factor of whether a communication is “part of an ongoing series of substantially similar advocacy communications” inappropriately favors single-issue interest groups and treats the exact same communication differently, depending on the speaker;
  3. The IRS factor regarding treatment of issues on which candidates differ simply serves to discourage nonprofit organizations from discussing the most important issues; and
  4. The IRS’ focus on contextual and external considerations (rather than the content of speech) renders the IRS’ facts and circumstances test constitutionally suspect.

In summary, Freedom Path describes the IRS test for determining whether or not speech is political campaign intervention as amounting to a “we know it when we see it,” leaving social welfare organizations to guess what is allowed and how to track activities, as required for legal compliance.

Such an approach seems extremely unpalatable for tax-exempt organizations seeking clarity about political activities, whether issue advocacy, lobbying, or political candidate activity. Tax-exempt organizational leaders thus should stay tuned to further developments. Freedom Path will soon enter its second decade of litigation toward its true path of constitutional freedom to engage in advocacy as a recognized Section 501(c)(4) organization. If the IRS test is struck down as unconstitutional, such a result may have very significant implications for tax-exempt organizations. New criteria will be needed, which will hopefully better honor First Amendment free speech protections. (For further reading about these constitutional tensions and a prior effort to resolve them, see S. Wagenmaker, Speak Up: Issue Advocacy in Increasingly Politicized Times, available here.)