October 3, 1973
Page 32705
REGULATION OF LEGISLATIVE ACTIVITIES BY TAX-EXEMPT ORGANIZATIONS: A CONSTITUTIONAL QUESTION
Mr. MUSKIE. Mr. President, for some years many of us in Congress have been concerned about Federal regulation of legislative activities of tax-exempt organizations. Currently, the tax code restricts tax-exempt publicly supported charities from engaging in "substantial" legislative activities. This standard is vague and subject to abuse. To correct it, I have introduced legislation each year since 1971 to substitute a more certain standard. The bill I introduced this year on February 28, together with Senators HUGH SCOTT, NELSON, and DOLE, now has a total of 34 cosponsors. Congressman SYMINGTON has introduced identical bills in the House, H.R. 4994 and H.R. 5095; these bills now have a total of 45 cosponsors. I understand that the House Ways and Means Committee has been considering these proposals as part of its work on tax reform legislation.
But in the past few months, a new question has been raised about these restrictions in the tax code: whether or not they violate the Constitution. This question has been thoroughly explored in an article by Thomas Troyer in the journal of the New York University's Institute of Federal Taxation. In typically brilliant style, Mr. Troyer sets out in detail "three lines of attack on the constitutionality of the legislative restriction: "
(1) The "doctrine of unconstitutional conditions," which in this case argues that the federal government cannot indirectly regulate First Amendment activities by tax exempt organizations, since it cannot do so directly;
(2) The equal protection standards of the due process clause of the Fifth Amendment, which arguably invalidates current restrictions because they discriminate among different kinds of charities; and
(3) The void-for-vagueness doctrine.
Mr. Troyer's analysis suggests that, on each of these grounds, restrictions in current law may well be unconstitutional. He also suggests that sections of the tax code penalizing legislative activities by private foundations may be unconstitutional. Mr. Troyer's fine article deserves study, and I ask unanimous consent that it be inserted in the RECORD at the conclusion of my remarks.
These constitutional questions are now being brought before the courts by two tax exempt organizations. Tax Analysts and Advocates, and Taxation With Representation, in a suit for a declaratory judgment to invalidate the restrictions. The outcome of this suit may have important consequences for the future conduct of tax exempt organizations, and for our first amendment freedoms. Congressman SYMINGTON has already inserted several documents relating to this suit in the CONGRESSIONAL RECORD of August 1. I ask unanimous consent that additional materials concerning this suit – two descriptive articles and a supplemental statement filed in court – also be printed in the RECORD.
There being no objection, the material was ordered to be printed in the RECORD, as follows:
CHARITIES, LAW-MAKING, AND THE CONSTITUTION: THE VALIDITY OF THE RESTRICTIONS ON INFLUENCING LEGISLATION
(By Thomas A. Troyer')
Attorney (Colorado, District of Columbia);Vice-Chairman, Committee on Exempt Organizations,
Section of Taxation, American Bar Association; Formerly Associate Tax Legislative Counsel, United
States Treasury Department; Associate Professorial Lecturer, George Washington University School of
Law; Adjunct Professor, Georgetown University Law Center; Contributor to Legal Periodicals; Firm;
Caplin & Drysdale, Washington, D.C.
SYNOPSIS
Criticism and proposals for modification.
Hearing on proposed liberalizations.
Constitutionality of Restriction.
Legislative history.
Dependence of restrictions on 1934 amendments.
What constitutes "charitable".
Cases under pre-1934 law.
Constitutional case against restrictions.
Unconstitutional Conditions Application of doctrine to legislative restrictions.
Possession of First Amendment rights by corporations.
Is First Amendment protection absolute here?
Balancing of government interest and burden to charities.
Cammarano descriptions of government interest.
Post-Cammarano congressional action.
Policy of 1962 Revenue Act.
Grass roots lobbying.
Application of deductibility to much grass roots business lobbying.
Difference in impact of tax rules on business and charities.
Not nondeductibility: death sentence.
Section 501(c) (4) alternative.
In sum: Cammarano and Section 162(e) (2) not controlling here.
Unconstitutional Conditions: Tax Support for Other Lobbying.
Veterans' organizations.
Number of organizations affected.
Fraternal beneficiary societies.
Number of organizations affected.
Ability of large charities to lobby.
Lobbying by funded charities.
Lobbying for social welfare organizations.
Lobbying by labor organizations and trade associations.
Number of organizations affected.
Conclusion: Slee does not state compelling government interest.
Another possible government interest.
Limitation upon lobbying by rich.
Effect for lobbying same as for other charitable activities.
Conclusion: strength of unconstitutional conditions attack.
Equal Protection. Americans United case.
Difference of equal protection argument in Americans United.
Concurring opinion in Americans United. Vagueness.
Sources of uncertainty.
Vagueness of I.R.S. explanation.
Applicability of Freund classification.
Consequences for organizations with rulings.
Advance rulings difficulties.
Consequences for new organizations.
Practical necessity of advance ruling.
Delegation of authority to I.R.S. personnel.
Assessment of vagueness attack.
Recent court action.
Private Foundation Restrictions: Direct Regulation of Speech.
Burden on foundations.
Termination tax.
Effect for foundations.
Government interest in restrictions.
Size and legislative involvement of foundations.
Amount of foundation expenditures.
Most foundation expenditures for nonlegislative purposes.
Comparison with legislative expenditures of businesses and labor groups.
Evidence presented to Congress in 1969.
Committee report rationale.
A look ahead: the courts and Congress.
By its terms, the exemption from federal income tax which Section 501(c) (3) established for charities extends only to organizations "no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation ..." The qualification of charities to receive contributions which their donors may deduct for federal income tax purposes is limited by an identical statutory provision. The statutes governing the estate and gift tax deductions for charitable contributions contain the same limitation.
CRITICISM AND PROPOSALS FOR MODIFICATION
In recent years, these limitations have become the subject of mounting criticism from a variety of sources
A well-known article in 1960 by Professor Clark of Yale Law School opened the barrage. In 1969 the American Bar Association joined the attack, proposing liberalization of Section 501(c)(3) and the related charitable deduction sections to permit direct communications by publicly supported charities with legislative bodies. In 1971 Senator Muskie introduced a bill modeled upon the American Bar Association recommendation, arguing:
"The groups which suffer most under these limitations of the Internal Revenue Code are civil rights organizations, consumer and environmental groups, and the recently established public interest law firms. The outstanding characteristic of these groups has been their advocacy of the views of those who are under-represented before governmental agencies, in the courts, and Congress. It is fundamental to our constitutional system that they should have equal access along with business groups and others in presenting views to Congress. This is so not because the views of the public interest groups are necessarily correct, but because in considering the increasingly complex matters which come before it, the Congress should hear and weigh all views to the fullest extent possible.”
Early in 1972 Senator Muskie and Senator Scott together introduced a somewhat modified form of this bill. Later that year Congressman Ullman and several other members of the House Ways and Means Committee introduced a bill with the same objectives but with further modifications.
HEARING ON PROPOSED LIBERALIZATIONS
At a hearing held by the House Ways and Means Committee on the Ullman bill in May of 1972, representatives of a large and diverse group of charitable institutions supported elimination or relaxation of the present restrictions on charities' legislative activities. The Administration was ambivalent. Speaking for the Council on Environmental Quality, Russell Train argued for liberalization:
"Public charitable groups represent deeply felt concerns of many of our citizens in many important areas – including health, education, and the environment. Many of these groups have much to contribute in the way of information and a wide range of views that can make a valuable contribution to the legislative process. At the same time, these very groups have avoided legislative appearances for fear of jeopardizing their tax-exempt and tax-deductible status.
"I can think of no more useful and practical step available to us right now than to clarify the authority of our citizens' many charitable associations to speak on their behalf to the legislature. It should be our purpose to encourage in every way we can the responsible participation by citizen groups in the process of government. The present law constitutes a roadblock to such participation and it should be remedied as rapidly as possible."
The Treasury Department, on the other hand, while expressing sympathy with "the objectives" of the Ullman bill, elaborated concern about a number of its provisions .
After the hearing, the Ways and Means Committee considered the Ullman bill in two executive sessions but, with the press of other business, took no further action on it.
The substance of the various proposals to relax the present constraints on charities' legislative activities, and the points of difference among the proposals, have been well summarized elsewhere. At present it is a matter of conjecture whether the Ways and Means Committee will take action on the subject this year. If it does, it seems likely that the action will depart in significant respects from all of the prior bills. The process of legislative compromise being what it is, it also seems likely that any liberalization adopted by Congress this year will leave at least much of the bite of the present restrictions intact.
CONSTITUTIONALITY OF RESTRICTIONS
That being the case, it seems worth asking a question which, until recently, has seldom been raised, and, so far as I know, has never been exhaustively examined. Are the restrictions constitutional? Analysis suggests that the answer may well be negative.
Preliminary to assessment of the constitutional issues, one must first determine whether the restrictions on influencing legislation are inherent in the fundamental Congressional judgment to continue the Section 501 (c) (3) and related tax benefits to "charitable" organizations or whether the restrictions depend upon the special statutory mandates against substantial legislative efforts.
If entities which attempt to influence legislation are naturally beyond the group meant to be assisted by the tax benefits provided charities, the constitutionality of withholding those benefits from them would stand upon essentially different footing than if qualifying as charities under applicable standards, they are denied the tax benefits only by reason of a separate and special Congressional decision to foreclose such organizations from substantial legislative efforts.
To resolve this threshold question, we must review briefly the legislative history of the present statutory provisions against substantial influencing of legislation and the authorities bearing on the dependence of the restrictions on those provisions.
LEGISLATIVE HISTORY
The limitations on the legislative activities of charities first appeared in the language of the statute in 1934. The legislative history of the 1934 amendments is sparse and unclear. It suggests that the primary focus of the proponents of the amendments was on a single organization (the National Economy League); that their objective was to rule out charitable deductions for selfishly motivated gifts, designed to advance the personal interests of the giver through legislative agitation; and that the language selected by the drafters of the amendments was thought to be unfortunately broad, likely to sweep within the restrictions more than their proponents intended to include. Nowhere does the legislative history indicate that Congress was aware of the prior case law on this subject. Nowhere do the published materials suggest that Congress thought the amendments simply a clarification of restrictions already inherent in the statutory term "charitable," or in other language of the exemption and deduction statutes as they then stood.
Indeed, to the extent that the limited legislative history permits one to draw a conclusion on the point, the implication is strong that Congress thought it was adding restrictions not previously included in these provisions.
DEPENDENCE OF RESTRICTIONS ON 1934 AMENDMENTS
Several cases decided under pre-1934 law grounded denial of charities' exemptions or qualification to receive deductible charitable contributions on efforts by the organizations to influence legislation. A review of the authorities, however, indicates strongly that, absent the 1934 amendment, the doctrine of those cases would long since have passed from the federal tax law.
WHAT CONSTITUTES "CHARITABLE"
Although it was far from evident as a matter of American tax law before 1934, it is settled by now that "charitable" is the most comprehensive of the terms designating exempt purposes in Section 501(c) (3), including each of the other purposes in the enumeration except "testing for public safety," and extending to activities which lie beyond any of the others. It was also far from evident before 1934 – but has by now been decided by the Supreme Court and accepted by the Internal Revenue Service – that the construction of "charitable" for federal tax purposes is governed by the general, non-tax law of "charitable trusts."
The United States decisions in the non-tax area are now overwhelmingly to the effect that an otherwise charitable trust remains charitable even though the attainment of its purpose entails influencing legislation. Scott says:
"In the United States the notion that a trust for a purpose otherwise charitable is not charitable if the accomplishment of its purposes involves a change in existing laws has been pretty thoroughly rejected. Many reforms can be accomplished only by a change in the law, and there seems to be
no good reason why the mere fact that they can be accomplished only through legislation should prevent them from being valid charitable purposes."
The Restatement is to the same effect. The cases amply support the proposition. It flows naturally from the general trust law principle that "if the purposes of the trust are charitable, they are no less charitable because of the means authorized to effectuate them, when these means are legal and not against public policy."
If, then, the law of charitable trusts governs the definition of "charitable" for purposes of the tax law, and the relevant law of trusts treats influencing legislation as a permissible means of carrying out a charitable purpose, it seems clear that, (but for the statutory amendments in 1934) charities could now without adverse tax consequence make use of legislative activities to advance their purposes and they could do so upon precisely the same basis as they make use of any other acceptable means to those ends. The rule preventing them from doing so must, in the first instance, be laid at the door of the 1934 Congress.
CASES UNDER PRE-1934 LAW
Slee v. Commissioner and the other decisions denying charitable exemptions or deductions under the pre-1934 law on the basis of the charities' legislative activities uniformly failed to recognize the relevance of the general law of charitable trusts to the definitional issue. They also failed to recognize that "charitable" is a broader term than "educational" – comprehending all that is "educational" and much else besides – and, proceeding from 1919 Treasury Regulations which excluded controversial communications from the "educational" category, they assumed that whatever was not educational could not be charitable. Slee itself suffers from both failures.
The subsequent development of the tax law makes it clear that, on both points, the courts were simply wrong. On the key issue, the Supreme Court has now held, and Treasury Regulations provide, that the general law of charitable trusts governs the tax definitions. With this evolution of the law, the legislative restrictions created by the early decisions in disregard of now-settled principles would necessarily have died, had not Congress created the 1934 restrictions on the legislative activities of charities.
One cannot establish the subsistence of the Slee rule by arguing that the permissibility of legislative efforts was less clear in the law of charitable trusts in 1913, or 1930, and that the doctrine developed by Judge Hand and his brethren, representing a plausible extrapolation from divided authorities in the non-tax area to the tax definition, remains good tax law. It is true that an 1867 Massachusetts case followed in 1922, denied charitable status on the basis of legislative activities, as did the English authority, though none of the tax cases under pre-1934 law founded their decisions on these authorities.
It is a settled facet of the law of charitable trusts, made applicable to the tax law by the courts and the Regulations adoption of the general law of charities for purposes of the tax definition of "charitable," that "charity" is a continually changing concept, developing and adjusting as the needs of society change. Hence, in determining whether in 1973 the tax restrictions on charities’ legislative activities stem from the definition of "charitable" or must stand on the special language added to the statute in 1934, the state of the trust law in 1913 or 1930 is irrelevant. The issue is the state of the American trust law in 1973. As the authorities cited above disclose, on that issue there can be little question.
CONSTITUTIONAL CASE AGAINST RESTRICTIONS
With this background, there would appear to be three lines of attack on the constitutionality of the legislative restrictions. One is founded upon the doctrine of unconstitutional conditions. The second derives from equal protection standards which the due process clause of the Fifth Amendment imposes on the Federal Government. The third is based on the void-for-vagueness doctrine.
Each of these attacks is, if sound, by itself sufficient to invalidate the legislative restrictions. Hence, if any of the three is valid, the restrictions must fall.
UNCONSTITUTIONAL CONDITIONS
The restrictions on substantial legislative efforts seem, first, a classic situation for the application of the doctrine of unconstitutional conditions. The doctrine has been described as follows:
"Essentially, this doctrine declares that whatever an express constitutional provision forbids government to do directly it equally forbids government to do indirectly. As a consequence, it seems to follow that the first amendment forbids the government to condition its largess upon the willingness of the petitioner to surrender a right which he would otherwise be entitled to exercise as a private citizen. The net effect is to enable an individual to challenge certain conditions imposed upon [a governmental benefit] without disturbing the presupposition that he has no 'right' to that [benefit]."
The Supreme Court has applied the rule, for example, to hold that unemployment benefits cannot be denied to a person who refuses to work on Saturday because of his religious principles; that public employment cannot be conditioned upon the employee's refraining from constitutionally protected speech activities; that a public school teacher cannot be discharged for invoking the privilege against self-incrimination; and that an attorney cannot be disbarred for invoking that privilege.
Most closely in point for present purposes is the Supreme Court decision in Speiser v. Randall. The Court there held that the State of California could not condition a veteran's property tax exemption upon the veteran's taking an oath not to advocate the overthrow of the government. The language of the decision is instructive:
"It is settled that speech can be effectively limited by the exercise of the taxing power. Grosjean v. American Press Co., 297 U.S. 233, 56 S. Ct. 444, 80 L.Ed. 660. To deny an exemption to claimants who engage in certain forms of speech is in effect to penalize them for such speech. The appellees are plainly mistaken in their argument that, because a tax exemption is a 'privilege' or 'bounty,' its denial may not infringe speech."
APPLICATION OF DOCTRINE TO LEGISLATIVE RESTRICTIONS
On its face, the doctrine of unconstitutional conditions appears plainly and directly applicable to the specification of the charitable exemption and deduction statutes that their privileges shall not extend to organizations having substantial activities aimed at the influencing of legislation. Much of the activity proscribed is within the First Amendment right to petition the Government, and all seems well within the broader first amendment protection of free speech. The effect of the restrictions, therefore, is to withhold or withdraw the privileges of tax exemption and qualification to receive deductible contributions from charities which engage in specified first amendment activities of more than an insubstantial amount. Justice Sutherland's description of the unconstitutional conditions rule in a leading early case seems clearly in point:
"It would be a palpable incongruity to strike down an act of state legislation which, by words of express divestment, seeks to strip the citizen of rights guaranteed by the federal Constitution, but to uphold an act by which the same result is accomplished under the guise of a surrender of a right in exchange for a valuable privilege which the state threatens otherwise to withhold. ...If the state may compel the surrender of one constitutional right as a condition of its favor, it may, in like manner, compel a surrender of all. It is inconceivable that guarantees embedded in the Constitution of the United States may thus be manipulated out of existence."
Initial measurement of the unconstitutional conditions doctrine against the charitable exemption and deductions' legislative restrictions, then, suggests a natural fit. Let us look more closely at the details of the application of the doctrine to evaluate the strength of the constitutional attack.
POSSESSION OF FIRST AMENDMENT RIGHTS BY CORPORATIONS
There is no direct Supreme Court decision that the First Amendment rights of free speech and to petition the Government are held in undiluted form by corporations. However, the Court has held squarely that the first amendment protection of freedom of the press extends to corporations as well as to natural persons. Several of the Court's other decisions appear to assume that the protection of speech and petition apply with undiminished force to corporations. The language of the amendment itself – "Congress shall make no law ... " – suggests that its prohibitions apply without regard to the legal character of the person whose speech or petition Congress seeks to restrain.
Hence, while the issue cannot be regarded as conclusively resolved, it seems likely that the first amendment rights of free speech and petition would be held to afford the legislative efforts of charitable corporations and trusts a protection equivalent to that which they provide the same efforts of individuals.
IS FIRST AMENDMENT PROTECTION ABSOLUTE HERE?
It may be that, having said this much, we have said enough. Describing Alexander Meiklejohn's view that the core of the first amendment is the protection of expressions which bear upon the governing process, broadly construed, Justice Brennan has said: "It is these activities of 'governing importance' in all their diversity that fall within the scope of the first amendment, and for such activities the amendment gives unqualified protection."
Justice Brennan proceeds to suggest that the cases of New York Times v. Sullivan and Garrison v. Louisiana adopt this approach to the application of the first amendment. Subsequent cases have cast no doubt upon the Justice's 1965 evaluation. If it is correct, it would seem to apply directly to the subject with which we are concerned; for the expressions of charitable institutions on legislative policy are plainly within the "governing importance" class.
Professor Van Alstyne has stated essentially the same view in slightly different terms. He argues that, where a government conditions a benefit upon desistence from the exercise of an explicit constitutional right, the unconstitutional conditions rule strikes down the condition without the necessity of any further inquiry into the strength of the government interest in imposing the condition, or the weight of the burden which it places on the party contesting it. The view seems supported by the approach of the Supreme Court in at least some of the cases applying the doctrine.
If these views are correct, and the relevant First Amendment protections extend to charitable corporations and trusts, the legislative restrictions of the charitable exemption and deduction statutes should fall, entirely and without further analysis or argument.
BALANCING OF GOVERNMENT INTEREST AND BURDEN TO CHARITIES
Let us not, however, leave the matter at that. While they antedate the Supreme Court decisions in the Times and Garrison cases, a number of holdings on the unconstitutional conditions doctrine have included inquiries by the Supreme Court into the character and strength of the government interest in establishing the condition in issue and the nature of the burden which it entails. Let us make similar inquiries concerning the legislative restrictions in the charitable exemption and deduction statutes.
CAMMARANO DESCRIPTION OF GOVERNMENT INTEREST
Where a condition impinges upon an explicit constitutional right – as is the case with the first amendment rights of free speech and petition – even the cases which approach the first amendment protections without the strictness suggested by Justice Brennan and Professor Van Alstyne sustain a condition on a government benefit only upon a showing that the Government has a "compelling" or "overriding" interest in the condition. The government interest in the restrictions on charities' legislative activities has been stated by the Supreme Court to be that described by Judge Hand in Slee: "Controversies of that sort [i.e., legislative] must be conducted without public subvention; the Treasury stands aside from them." Indeed, after quoting Judge Hand, the Cammarano opinion goes on to describe this as "sharply defined policy" of the Federal Government." Is it?
POST-CAMMARANO CONGRESSIONAL ACTION
Cammarano upheld a Treasury Regulation denying business expense deductions for the costs of attempts to influence legislation. In at least one important part of the area dealt with by that decision, federal policy, so far from being "sharply defined" against tax support for the legislative activities of private parties, now specifically provides such support.
Three years after the Cammarano case, Congress reversed its result for most business expenses of direct communication with legislative bodies. With certain limitations, where a business incurs such expenses in an effort to influence legislation, the expenses are now specifically made deductible by Section 162(e). Thus, in legislative controversies involving such expenses, the Treasury – and the general taxpayer – no longer stand aside. Through the mechanism of tax deductions, the Federal Government provides financial support for the lobbying efforts of private parties.
POLICY OF 1962 REVENUE ACT
The policy grounds for the 1962 Congressional action are significant. Congress reversed the rule of prior law only partly from a belief that proper computation of businesses' net income requires deduction of direct lobbying expenses. The Senate Finance Committee Report relies more heavily upon several quite different arguments in favor of the amendment – and all of them would apply with equal force to the elimination of the restrictions on charities' legislative activities. In particular, the Finance Committee observed: "The presentation of such information to the legislators is necessary to a proper evaluation on their part of the impact of present or proposed legislation."
With this policy underpinning, in the area of direct communication with legislative bodies the 1962 Congressional action would seem at least very largely to erode the Cammarano finding of a "sharply defined" government interest against tax support for the legislative conduct of private parties.
GRASS ROOTS LOBBYING
The 1962 Act did not extend deductibility to business expenses of grass roots lobbying.
Section 162(e) (2) specifies that the statutory provisions for direct lobbying "shall not be construed as allowing the deductibility of any amount paid or incurred in connection with any attempt to influence the general public, or segments thereof, with respect to legislative matters."
It does not, however, follow that the failure to revise prior law on this point constitutes a Congressional finding of a compelling governmental interest sufficient to sustain the exemption and deduction restrictions on grass roots legislative efforts by charities.
APPLICATION OF DEDUCTIBILITY TO MUCH GRASSROOTS BUSINESS LOBBYING
As a practical matter, businesses are in fact able to deduct much of the costs of communications with the general public which bear on legislative matters. The line between deductible institutional advertising and non-deductible grass roots lobbying is sufficiently blurred – and the audit resources of the Internal Revenue Service sufficiently limited – to permit the deduction of considerable costs of business advertising designed to affect the views of the general public on issues which are present or will surface in legislative bodies. The fact has been noted by a former Commissioner of Internal Revenue, has been explored in more detail by Professor George Cooper of Columbia Law School, and was recently admitted by the Assistant Secretary of the Treasury for Tax Policy to the Ways and Means Committee.
Illustrations of grass roots legislative appeals by businesses abound. During the debate about tax reform in the 1972 Presidential campaign, Bethlehem Steel Corporation placed full-page advertisements, intended to demonstrate the absence of need for tax reform affecting it, in Newsweek, Time, U.S. News and World Report, Business Week, The Saturday Review, Industry Week, Forbes, The Harvard Business Review, Editor & Publisher, and nineteen newspapers.
A Washington Post article of February 4, 1973, describes a current $3 million advertising campaign by the petroleum industry, designed to focus public attention on the energy crisis and, among other things, develop support for pending legislation to remove the Federal Power Commission's ability to regulate the price of natural gas. The campaign included television advertising estimated by the American Petroleum Institute to have reached 95 percent of all American homes with television sets. Senator Muskie has described the grass roots efforts of business groups interested in legislation on the Supersonic Transport.
The comments of the witnesses noted above at the Ways and Means Committee hearing on the Ullman Bill makes clear that disallowance of business expense deductions for such advertising "is probably not a realistic expectation."
In this state of affairs, the failure of Congress to tighten the restriction on business expense of deductions for grass roots lobbying, or to adopt more distinct standards for the disallowance of such deductions, by itself would seem to cast doubt on the presence of a compelling government interest here.
DIFFERENCE IN IMPACT ON TAX RULES ON BUSINESSES AND CHARITIES
Even if one takes the limitation of the 1962 amendment to direct lobbying as indicative of the existence of a governmental interest in the grass roots lobbying area, the interest is not one which justifies the exemption and deduction restrictions on charities' lobbying. To the argument that Speiser v. Randall and the unconstitutional conditions doctrine required the allowance of business deductions for the costs of grass roots lobbying, the Supreme Court in Cammarano responded:
"Petitioners are not being denied a tax deduction because they engage in constitutionally protected activities, but are simply being required to pay for those activities entirely out of their own pockets."
The Congressional action in 1962 did no more than leave that rule in effect for businesses' grass roots lobbying. Consequently, to the extent that the action can be deemed to manifest Congress' perception of a governmental interest, the interest cannot have been one in preventing grass roots legislative appeals – for businesses could make such appeals without limit before, and they continue to be able to do so now, so long as they do not deduct the attendant costs. Insofar as the Section 162(e) (2) limitation is effective at all, it amounts to no more than a Congressional statement that businesses which wish to appeal to the public on legislative issues must use their own funds to do so.
NOT NONDEDUCTIBILITY: DEATH SENTENCE
Charities which depend upon the charitable contribution deduction for their financial support, however, do not have that option. The effect of the legislative restrictions on their qualification to receive deductible contributions is altogether to preclude them from engaging in legislative efforts beyond the insubstantial level. If their legislative activities exceed that level, they cannot simply pay tax on the funds which finance the activities; they must surrender entirely their ability to receive deductible contributions for all periods after the Internal Revenue Service announces their fall from grace to the public – and until their legislative activities subside to insubstantiality.
The threat is of a wholly different scale than the prospect of nondeductibility for a business. The impact which loss of Section 170 qualification will have on the charity's capacity to raise funds from the general public and from foundations is in no way limited to, or measured by, the cost of the charity's legislative activities, or the taxes which might have been paid on that amount by the charity or its donors. Describing the practical effect of denial of contribution qualifications, a recent Court of Appeals decision has said:
"Because of the ‘tax breaks’ attendant to contributions to corporations qualifying under § 170 (c) of the Code, qualifications thereunder is a precious possession and removal from the Cumulative List, Organizations Described in Section 170(c) of the Internal Revenue Code of 1954 is a damaging – sometimes fatal – injury to the financial status of any 'charitable' organization. Potential contributors with a minimum of business acumen are careful to get the most for their contributed dollar, and one certain way not to do so is to contribute to non-§ 170 corporations. Appellant, therefore, [is] presented with the dollar dilemma of finding prospective contributors closing their wallets ... "
SECTION 501 (C) (4) ALTERNATIVE
It is no answer to say that personnel of a charity which wishes to express legislative views may establish a separate organization exempt under Section 501 (c) (4), attempt to obtain non- deductible funding for it, and proceed to do their best to influence legislation through the new organization.
An established charitable institution with an on-going program in any of a great variety of areas – mental health, or conservation, or educational psychology, or public interest law – will work extensively under and with the existing laws which apply in its area. It will develop familiarity with those laws, expertise in their practical operation, and knowledge of their defects. Its charitable work will, thus, produce an institutional fund of knowledge and experience from which proposals for improvement of existing law naturally flow.
If those connected with the charity form a Section 501(c) (4) organization, the Internal Revenue Service will quite properly insist that none of the operations and resources of the charity be employed to support activities of the Section 501(c) (4) organization which the charity could not itself have carried on directly. The Service takes the position that research and study exploited by legislative efforts may themselves be treated as "attempts to influence legislation." In fact, it scrutinizes relationships between charities and Section 501(c) (4) organizations carefully to make certain that no impermissible support of the Section 501 (c) (4) organizations' activities is occurring.
As a consequence, the legislative views and proposals developing from the work of the charity will be subject to essentially the same restraint flowing from the legislative restrictions of the charitable deduction statutes even where those interested in the charity form a separate Section 501(c) (4) organization to carry on legislative efforts.
In Sum: Cammarano and Section 162(e) (2), Not Controlling Here
The restraint which the legislative restrictions of the charitable deduction statutes impose on the expression of legislative views by charities, thus, is real. In foreclosing such expressions altogether where they are more than insubstantial, the restrictions create for charities a burden which is both far greater, and different in kind, than the effect for businesses of the denial of deductions for the expenses of lobbying. Consequently, it does not follow, from Cammarano's holding of the constitutionality of the business deduction limit, that the legislative restrictions on charities are also constitutional. Similarly, it does not follow, from the 1962 Congressional preservation of the rule that busineses must pay for their own grass roots lobbying, that there is a compelling government interest in foreclosing charities altogether from substantial legislative activities.
UNCONSTITUTIONAL CONDITIONS: TAX SUPPORT FOR OTHER LOBBYING
Aspects of the tax laws beyond Section 162(e) shed further light on the question whether the Federal Government has a compelling interest in denying exemption and qualification to receive deductible contributions to charities which carry on substantial legislative activities.
VETERANS' ORGANIZATIONS
Since 1924 Section 170(c) (3) and its predecessors have granted charitable contribution deductions for donations to "A post or organization of war veterans or an auxiliary or society of, or trust or foundation for, any such post or organization" if they are domestically organized and their earnings do not inure to private parties. Similar provisions extend gift tax deductions to donors to such organizations; a more limited provision for some such organizations grants estate tax deductions for bequests to them.
Before 1972, most veterans' organizations were exempt from federal income tax under Section 501(c) (4). Some were exempt under Section 501(c) (7). A 1972 amendment established special exemption for them under Section 501(c) (19).
None of these statutes conditions its benefit upon veterans' organizations' refraining from efforts to influence legislation. On the contrary, it has been clear for many years that Section 501(c) (4) organizations may engage in an unlimited amount of legislative activity without jeopardizing their exemption. The legislative history of Section 501 (c) (19) gives one no reason to believe that a different rule will obtain under the new exemption provision.No published authority indicates that the Internal Revenue Service has ever asserted that a veterans' organization loses its qualification to receive deductible charitable contributions by reason of legislative activity.
NUMBER OF ORGANIZATIONS AFFECTED
The tax benefits for veterans' organizations are not merely of theoretical interest. They have very broad practical application. They affect such large and affluent national organizations as the American Legion and the Veterans of Foreign Wars, and the multitude of local posts and other subsidiary units of such organizations. The American Legion and its affiliates have historically been among the most active lobbying organizations on the national scene. By reason of the tax rules which govern such organizations, they may, without quantitative limit, employ tax- deductible and tax-exempt funds to influence the views of the general public on legislative matters, to influence the positions which executive bodies take on legislative issues, and to influence legislative bodies themselves.
Here, too, then, the Treasury does not stand aside. By means of both contribution deductions and tax exemption, it provides the support of the tax system for the expression of legislative views by veterans' organizations.
FRATERNAL BENEFICIARY SOCIETIES
With only minor variations, the same observations are true of fraternal beneficiary societies.
Here, also, the charitable contribution provisions of the income and gift tax statutes extend deductibility to donations to such organizations for charitable purposes, without imposing any limitation on a qualifying organization's legislative activity. Here, also, the statutes providing income tax exemption for such organizations do not condition their benefits upon the organization's refraining from legislative activity.
To be permissible under the charitable deduction sections, of course, the legislative activity of fraternal beneficiary societies must be in pursuance of charitable purposes. Within that limit, however, no authority suggests that the Internal Revenue Service asserts the existence of a restriction on the legislative efforts of fraternal beneficiary societies. The fact that the chapter of the Internal Revenue Service Exempt Organization Handbook dealing with fraternal beneficiary organizations does not mention the matter – in contrast to the Handbook's detailed discussion of the legislative limitations on charitable organizations – affords persuasive evidence that the Service does not take such a position. In any event, absent specific statutory authority for it, the Service would have to derive such a restriction from the definition of the term "charitable." It is clear, from what has been said on that subject above, that if the Service were to adopt this approach it would be wrong.
NUMBER OF ORGANIZATIONS AFFECTED
As with veterans' organizations, the tax rules relating to fraternal beneficiary societies are of more than theoretical interest. They apply to many thousands of organizations throughout the country, a considerable number of which are possessed of very substantial resources. The Elks, the Moose, the Eagles, the Masons, the Shriners, the Knights of Columbus, and their plethora of local chapters and affiliates qualify for these tax benefits. An Internal Revenue Service study in 1965 found that fraternal beneficiary societies were deriving premiums in the range of $500 million a year from their insurance business. The same study showed very large real estate investments by many of these societies.
That organizations of this magnitude, with resources so extensive, may express their views on legislative issues without losing their federal tax privileges constitutes persuasive evidence of the absence of a "sharply defined" national policy against tax support of private legislative activities.
ABILITY OF LARGE CHARITIES TO LOBBY
One finds further evidence to the same effect in Section 501(c) (3) itself.
The vagueness of the substantiality test has frequently been remarked and we shall consider it in greater detail hereafter. However fuzzy its boundaries, the test seems clearly to require comparison of the legislative activities of a charity with its total program of exempt operations. The result is that a large organization with an extensive exempt program, can carry on more legislative activity without losing its tax privileges than can a small one. Congress itself has pointed out this aspect of the rule.
For very large charities the consequence is that a considerable amount of lobbying can be carried on with tax-exempt and tax-deductible funds. Professor Clark noted the activities of the Roman Catholic Church in preventing modification of the Connecticut criminal statute on contraceptive devices. Since the time of his article, the Roman Catholic Church has taken active part in the controversy over abortion legislation, apparently without adverse tax consequences. Large universities and colleges lobby on issues which affect them, both in Congress and in state legislatures, and none appears to have lost its tax privileges for doing so.
Here, too, one finds ground for questioning the presence of a "sharply defined" national policy against tax support of efforts to influence legislation.
LOBBYING BY FUNDED CHARITIES
Still another facet of the tax law is relevant. Because of the broad correspondence of the requirements of Section 501(c) (3) and those of Section 501(c) (4), and the absence of a limitation on legislative activities in Section 501(c) (4), charities which lose their qualification under Section 501(c) (3) by reason of legislative activity commonly establish exemption under Section 501(c) (4) . The Senate Finance Committee specifically noted that fact in 1969:
"In addition, a well-endowed organization may engage in lobbying and, if it loses its exempt educational or charitable status, may avoid tax on its investment income by becoming exempt under another provision of the law."
The staff of the Joint Committee on Internal Revenue Taxation recently reported to the Ways and Means Committee that:
"It should be pointed out that loss of exemption under Section 501(c) (3) because of legislative activities rarely, if ever, results in conversion of the organization's status from nontaxable to taxable. Rather, the organization usually retains its exempt status by reclassification under some other section of the Code, such as Section 501(c) (4)."
After conversion to Section 501(c)(4) status, an organization may apply itself without limit to legislative endeavors – and it may use the endowment which it originally received in deductible contributions to support those efforts. Once again, we find tax dollars supporting attempts to influence legislation. While the total amount is probably not great in this instance, the fact that the tax-writing committees of Congress are specifically aware of situations like this – and are willing to tolerate them for publicly supported charitable organizations – is another item of evidence that one must tot up against the existence of a compelling government interest against tax support of legislative activities.
LOBBYING BY SOCIAL WELFARE ORGANIZATIONS
We have so far confined our attention to the legislative activities of organizations qualifying to receive deductible charitable contributions. The federal tax laws support the legislative efforts of private parties in two additional ways which deserve mention.
Beyond veterans' groups, which I have discussed separately because of their entitlement to deductible charitable contributions, Section 501(c) (4) has long conferred the valuable privilege of tax exemption upon a broad and heterogeneous potpourri of "social welfare" organizations, a number of which participate extensively in attempting to influence legislation. Included here, for example, are such organizations as the National Rifle Association, Common Cause, Ralph Nader's Public Citizen, and Taxation With Representation.
To the extent of the amounts which these organizations realize from dealings with their members, it is arguable that their exemption constitutes a statutory recognition that membership receipts of mutual organizations are not properly "income." Absent the specific exemption, nonetheless, it seems clear that most such receipts would be treated as income and taxed accordingly.
More broadly, the Section 501(c) (4) exemption also shelters important items as investment income and income from businesses treated as "related" to exempt purposes. These would be considered "income" by anyone's definition, and are generally applied by the exempt organization to pursuits that would be non-deductible to the members if carried on directly by them.
Permitting the tax-free realization of income for such pursuits, the Section 501(c) (4) exemption represents a clear departure from general income tax principles and, therefore, required a special act of legislative grace.
For social welfare organizations which derive income from investments or related businesses, the result of that act of legislative grace is a direct increase in the funds available for influencing of legislation. Here again, far from standing demurely aside, the Treasury pitches – or, rather, is pitched, willy-nilly – into the legislative melee.
LOBBYING BY LABOR ORGANIZATIONS AND TRADE ASSOCIATIONS
Two other classes of organizations which engage in extensive legislative activities also have federal tax exemption. Labor and agricultural organizations are exempt under Section 501(c) (5). Trade associations, chambers of commerce, and similar business organizations are exempt under section 501(c)(6).
These organizations are species of mutual institutions, and most of the activities which they conduct could be carried on by their members with deductible funds. It can, hence, be argued that the Section 501(c) (5) and (6) exemptions do not depart as far from otherwise applicable tax principles as, for example, do the exemptions of Sections 501(c) (3) and 501(c) (4).
Nonetheless, it is quite clear that, absent the specific grant of the Section 501(c) (5) and (6) exemptions, the organizations to which they apply would be subject to the federal income tax. Moreover, where Congress has encountered compelling policy ground for withdrawing these exemptions, it has done so. Confronted by the prospect of competition between unrelated businesses conducted by organizations in these categories (and certain others) with taxable businesses, Congress in 1950 applied the income tax to the profits which Section 501 (c) (5) and (6) organizations derive from such businesses. Again, when Congress became concerned about tax-exempt organizations' acquisition of income-producing property with borrowed funds, its remedy was pro tanto restriction of the exemption for Section 501(c)(5) and (6) organizations, as well as for other classes of exempt organizations.
NUMBER OF ORGANIZATIONS AFFECTED
The tax rules which apply to Section 501 (c) (5) and (6) organizations permit them great latitude to attempt to influence legislation in carrying out their exempt purposes. Many of them make broad use of that ability. One need only name some of the organizations exempt under these provisions to suggest the dimensions of the legislative efforts.
The Section 501(c) (5) exemption applies to the AFL-CIO, the United Auto Workers, the American Farm Bureau, and the National Farmers Union.
The Section 501(c) (6) exemption applies to the American Medical Association, the National Chamber of Commerce, the American Petroleum Institute, the American Bankers Association, and a host of less well-known trade associations a considerable part of whose functions consist of attempting to influence legislation.
The legislative activities of organizations in both categories include both direct lobbying and grass roots appeals. Congress is not unaware of these organizations; it sees their representatives every day. That it has not responded to their legislative activities as it did to their unrelated business activities and their debt-financed property acquisitions – by restriction of their tax exemptions – would seem further persuasive evidence of the absence of any sharply defined national policy against tax support for the legislative activities of private parties.
SLEE DOES NOT STATE COMPELLING GOVERNMENT INTEREST
Reviewing the relevant federal tax law, then, we find tax benefits for a considerable variety of organizations which do – or may – engage in legislative efforts. Businesses may now deduct the expenses of direct lobbying. Veterans' organizations qualify for deductible charitable contributions and income tax exemption, and neither benefit is conditioned on their refraining from attempts to influence legislation. Fraternal beneficiary societies receive substantially the same tax benefits, and have the same freedom to influence legislation. Large charities may conduct a considerable amount of legislative activity with tax-deductible and tax-exempt funds.
As a practical matter, funded charities may do the same thing – and Congress, manifesting specific awareness of both of these facts, has done nothing about them. The (tax exemptions) for social welfare organizations, labor organizations, and trade associations also provide federal support for a great number of institutions which participate in legislative controversies.
On this record, it is difficult to escape the contention that the policy stated in Slee and referred to in Cammarano is not a compelling government interest such as to justify the exemption and deduction restrictions on charities' first amendment rights to express themselves on legislative matters. The federal tax laws support the legislative efforts of a considerable number and variety of organizations, in several different ways. As we have seen with the Section 501(c) (5) and (6) exemptions, not all of those ways are precisely analogous to the support which the Section 501(c) (3) exemption and the related charitable contribution deduction provisions extend to charities.
But all afford real assistance, through the mechanism of the federal tax system, for the legislative efforts of private parties.
Singly, no one of these provisions might indicate the absence of a compelling government interest in tax neutrality in this area. Together, however, they can not be viewed as consistent with the presence of any such interest.
ANOTHER POSSIBLE GOVERNMENT INTEREST
To make certain that we have given full weight to the constitutional case which can be made in favor of the restrictions on charities' legislative activities, another policy ground which might be asserted for the restrictions must be examined.
LIMITATION UPON LOBBYING BY RICH
Because it operates in a progressive tax rate structure, the charitable deduction provides larger benefits in high tax brackets than it does in low ones. The fact has been characteristic of the charitable deduction, pointed out repeatedly. On the basis of this one might argue that the legislative restriction incorporated in the deduction provision constitutes a device for preventing disproportionate participation by the rich in legislative decisions.
One difficulty with the use of this argument to make out a compelling government interest in the legislative restrictions is simply that neither Congress nor the courts have ever recognized this principle to be the foundation or the justification for those restrictions.
Secondly, a number of the tax provisions which we have examined in evaluating the Slee statement are equally inconsistent with treatment of this principle as a compelling government interest. While the Section 170 (c) (2) deduction gives maximum advantage to high-bracket taxpayers, the deductions for gifts to veterans' organizations and fraternal beneficiary societies have exactly the same effect; and the advantage of the Section 170(c) (2) deduction itself extends to upper-bracket taxpayers supporting the legislative efforts of large public charities, or funded public charities. The business deduction for direct lobbying has a similar differential advantage for high-income corporations and individuals. In none of these situations has Congress found the advantage to upper-bracket taxpayers sufficient cause for restricting legislative activity.
EFFECT FOR LOBBYING SAME AS FOR OTHER CHARITABLE ACTIVITIES
The effect which the charitable deduction has for the upper-bracket taxpayer in this area is simply one limited facet of the impact of the deduction throughout the entire range of its operation.
Because of the fact that it works in a progressive rate structure, the deduction affords the upper-bracket taxpayer an advantage in supporting education, religion, conservation, research, public interest law, and all of the other activities carried on by charitable organizations. Undoubtedly, that advantage, coupled with the greater resources which this group of taxpayers already has, gives them greater influence than the poor have on the subjects which our children are taught, the methods by which they are taught, the activities which our religious organizations undertake, the kinds of research done by our educational and other institutions, and the very large range of other activities of charities which shape, inform, influence, and direct our society.
With these ramifications of the charitable deduction throughout the area of its operation, it is difficult to make out a case for the existence of a compelling government interest in singling out legislative expression from the panorama of charitable activity and imposing special restraints on it to prevent undue influence by taxpayers in higher tax brackets.
CONCLUSION: STRENGTH OF CONSTITUTIONAL CONDITIONS ATTACK
In sum, the unconstitutional conditions challenge to the legislative restrictions on charities seems quite strong. The activities upon which those restrictions impinge – comment by charities on matters of legislative policy – are expressions of a kind which lie within the core of the first amendment protections. What authority there is suggests that those protections apply with undiminished force to corporations and trusts.
It may be that these propositions by themselves would be sufficient for the Supreme Court to hold the legislative restrictions unconstitutional. The analyses of Justice Brennan and Professor Van Alstyne seem to suggest so.
If not, the Supreme Court would have to embark upon an examination of the government interest supporting the restrictions and the burden which the restrictions impose on first amendment expression. A review of other provisions of the federal tax laws reveals a multitude of tax benefits for private legislative activities and, therefore, strongly suggests that there is no compelling government interest in the Section 501 (c) (3) and related restrictions.
On the other hand, the burden on charities – making substantial legislative activity cause for denial of the vital right to receive deductible contributions – is real, considerable, and of far greater magnitude than the burden to businesses of denying deductions for lobbying expenses. For those reasons, the Cammanano decision would seem not to support the constitutionality of the restrictions.
In light of these facts, the case for application of the doctrine of unconstitutional conditions to Section 501(c)(3) and related legislative restrictions on charities appears imposing.
EQUAL PROTECTION
A second ground exists for constitutional attack on the legislative restrictions.
The restrictions discriminate between charities with substantial legislative activities and those without them. Ordinarily, to satisfy equal protection standards which the due process clause of the fifth amendment applies to the Federal Government, a discriminatory legislative classification need only be supported by a showing that it rests upon a rational basis. However, where the classification bears on constitutional or other fundamental rights, considerably stricter scrutiny obtains. Specifically, where the classification extends preferential treatment to those refraining from the exercise of first amendment rights, it will be sustained only if it guards a compelling governmental interest.
If the equal protection argument is made in these terms, the critical issue becomes the one upon which we have focused in our analysis of the unconstitutional conditions doctrine. From what has been said here, it seems clear that, on the basis of the considerable number of other federal tax provisions supporting organizations which attempt to influence legislation, a strong case can be made for the proposition that the Section 501(c)(3) and related legislative restrictions do not stand upon a compelling government interest. If that case is sound, the due process clause of the fifth amendment should invalidate the restrictions; but in doing so, it will only duplicate the impact of the unconstitutional conditions doctrine.
AMERICANS UNITED CASE
In a case recently decided by the Court of Appeals for the District of Columbia, a charity placed the equal protection argument in somewhat different terms. The Internal Revenue Service had revoked a ruling holding Protestants and Other Americans for Separation of Church and State ("Americans United") exempt under Section 501(c) (3) and qualified to receive deductible contributions under Section 170(c) (2), basing the revocation on the organization's legislative activity. To the Court of Appeals, Americans United argued that the Service's action constituted unconstitutional discrimination against it because larger charities, with more extensive programs of exempt activities, could carry on the same quantum of legislative activity without loss of their entitlement to receive deductible contributions. The court held that the contention presented "substantial constitutional questions" and remanded the case to the District Court with instructions to convene a three-judge panel to consider them.
In the course of the proceeding, the Government asserted the absence of constitutional issues, citing Cammarano. Americans United responded by referring to the sentence of the Cammarano opinion confining the holding to "nondiscriminatory" denial of tax benefits. The court described the organization's arguments as follows:
"Americans United, on the other hand, alleges just that the discriminatory conduct found lacking in Cammarano. This discrimination relates solely to the "size" of the organization, which appellants allege is directly related to its wealth and power structure, and comes into play during, and because of the exercise of first amendment protected liberties. By allowing larger, richer organizations more "dollar punch" in terms of "propagandizing" and "influencing legislation" before their respective activities are considered "substantial," the Commissioner is accused of following the mandate of § 501(c) (3) and treating identical activity differently, solely on the basis of the size, or wealth, of the acting party."
DIFFERENCE OF EQUAL PROTECTION ARGUMENT IN AMERICANS UNITED
This argument, plainly differs from the equal protection argument outlined in the preceding section. Here the contention is not that organizations identical in all respects but for their exercise of first amendment rights should be accorded equal tax treatment. Rather, the argument requires comparison of organizations which differ in characteristics beyond their exercise of first amendment rights. Without varying its principle, the argument could be extended to assert that the availability of deductions for contributions to veterans' organizations and fraternal beneficiary societies – without regard to the quantity of legislative activities which these organizations carry on – presents unconstitutional discrimination against charities.
Placed in these terms, the equal protection argument has the advantage of enabling the charity relying on it to compare itself with other organizations which are capable of using tax-deductible funds to support legislative activities on the same issues in which the charity itself is interested.
In the Americans United case, for example, the argument makes it possible for Americans United to assert that the Section 170(c) (2) (D) rule allows churches to use tax-deductible funds on one side of a legislative controversy, but prevents Americans United from using such funds on the other side. Although equal protection is not, strictly speaking, a question of fairness of treatment, this phrasing of the argument plainly has litigating appeal.
CONCURRING OPINION IN AMERICANS UNITED
On the other hand, when one puts the equal protection argument in terms which require comparison of organizations differing in respects other than their exercise of first amendment rights, one opens the possibility of justification of the differential tax treatment on the basis of these other differences. The difficulty is illustrated by the concurring opinion in the Americans United case:
"In short, it is certainly arguable that small groups are not being treated differently by § 501(c) (3) because they are small, but because they are obviously operating for a different purpose if they devote their comparatively small funds on a much different proportionate basis to propaganda for legislation."
The analysis suggested by the concurring opinion seems wrong. It fails to distinguish between purposes and means of carrying out those purposes. In fact, legislative activities are only a means of accomplishing an independent purpose. Where the purpose is charitable – as where it relates to the promotion of health, protection of the environment, or the like – under the law of charitable trusts the legislative activity would be permissible to the charity if it is reasonably related to the purpose.
Determining whether the purpose is charitable requires precisely the same analytic task whether the organization is small or large. Once the purpose is found to be charitable, the scale of the charity's legislative activities in pursuance of the purpose is not relevant to the question whether the organization is "charitable."
Nonetheless, the willingness of the concurring judge to inquire into the differences of large charities from small ones indicates the direction of possible response to the equal protection argument once it is couched in the terms used by Americans United. This is not to say that the equal protection argument may not ultimately be successfully cast in these terms. It may be that the courts will find no adequate justification for the discrimination challenged in the other characteristics of the organizations with which the charity compares itself. That result would seem particularly likely where the charity does not rest its entire case on the comparison with large Section 501(c) (3) organizations, but also includes reference to the treatment of veterans' organizations and fraternal beneficiary societies. The substantiality test of Section 501(c) (3) and its consequences for large charities may be argued to have justification in administrative considerations or the prevention of excessive Internal Revenue Service involvement in the affairs of churches and other large charities. However, it is very difficult to see what compelling government interest can be said to support withholding qualification to receive deductible contributions from charities which lobby but, at the same time, permit granting such qualification to veterans' groups and fraternal societies which lobby.
VAGUENESS
A third and independent attack can be made on the legislative restrictions of Section 501(e) (3) and the related charitable contribution provisions on the ground of their vagueness. A number of Supreme Court decisions hold that statutes which impinge upon first amendment conduct must be drafted with precision and clarity. The Supreme Court has summarized, the law as follows:
"We emphasize once again that "[p]recision of regulation must be the touchstone in an area so closely touching our most precious freedoms ... [f]or standards of permissible statutory vagueness are strict in the area of free expression. ...Because First Amendment freedoms need breathing space to survive, government may regulate in the area only with narrow specificity.... When one must guess what conduct or utterance may lose him his position, one necessarily will steer far wider of the unlawful zone ... For [t]he threat of sanctions may deter almost as potently as the actual application of sanctions ... The danger of that chilling effect upon the exercise of vital First Amendment rights must be guarded against by sensitive tools which clearly inform [those subject to the limitations] what is being proscribed."
The uncertainties of the legislative restrictions of Section 501(e) (3) and the related charitable contribution provisions have been pointed out frequently. The Senate Finance Committee itself observed in 1969 that:
“– the standards as to the permissible level of activities under present law are so vague as to encourage subjective application of the sanction ... "
In the 1972 Ways and Means Committee hearings on the Ullman bill, members of the committee repeatedly expressed their concern about the vagueness of the present standards. Former Commissioner Caplin has made the same point.
SOURCES OF UNCERTAINTY
The ambiguity of the legislative restrictions stems in part from the presence of the term "substantial," but it extends well beyond that portion of the statutory language. A key problem is to distinguish between "attempting to influence legislation" and permissible discussion of controversial topics. Further, where an attempt to influence legislation is found, one must determine what other conduct of the organization, perfectly permissible if no attempt to influence legislation were present – for example, research – must be included with the end product in assessing the substantiality of the organization's legislative activity. On none of these critical points do the Regulations under Section 501(c) (3) provide any significant assistance. Other authorities are of little more help.
VAGUENESS OF IRS EXPLANATION
Several sentences from the Internal Revenue Service's own exposition of the legislative restrictions indicate the vagueness of the restrictions, and their possible breadth:
“... This includes all appeals to the general public, not merely those that contain a request to contact a legislator or take other specific action. ... If the underlying purpose is the advocacy of particular legislation, then there has been an attempt to influence legislation within the meaning of the Code. ... In determining substantiality, it is sometimes difficult to determine what supporting activities should be included with the proscribed attempts to influence legislation ... attempting to influence legislation does not necessarily begin at the moment the organization first addresses itself to the public or to the legislature. ... There is no simple rule as to what amount of activities is substantial. The one case on this subject is of very limited help.”
APPLICABILITY OF FREUND CLASSIFICATION
Professor Freund has found "three grades of certainty" in the language of statutes of general operation. As a leading Pennsylvania Law Review article on the subject has pointed out, statutes unconstitutional for vagueness are largely those containing language which falls within Professor Freund's third category: "terms involving an appeal to judgment or a question of degree." On all of the grounds noted above, the Section 501 (c) (3) and related legislative restrictions seem well within that class.
CONSEQUENCES FOR ORGANIZATIONS WITH RULINGS
For a charity which has received a ruling from the Internal Revenue Service that it is exempt under Section 501(c) (3) and qualified to receive deductible charitable contributions under Section 170, the ambiguity of the legislative restrictions presents serious problems. The organization, first, will commonly be unable to determine whether proposed conduct is an attempt to influence legislation. It will also be unable to determine what other activities and expenditures will be lumped with the attempt to influence legislation if one is found. Finally, it will have no means of determining in advance whether proposed legislative activity comprises a "substantial" part of its program.
ADVANCE RULINGS DIFFICULTIES
The charity will not be able to obtain an advance ruling from the Internal Revenue Service on any of the difficult interpretative questions here. The Americans United case opens the possibility of obtaining declaratory judgments in certain instances. But on some key issues here – as, for example, substantiality – the courts would be no better able to give an advance determination than the Internal Revenue Service. In any event, the charity with a continuing program possessing possible legislative overtones would find it impractical to have each of the questions facing it presented to a court before proceeding with the proposed conduct.
Under the legislative restrictions, hence, the charity must make a variety of difficult and uncertain judgments for itself – and it must be correct, or surrender its tax exemption for all of its income and its entitlement to receive deductible contributions. It would be difficult to think of a clearer instance of the chilling effect of statutory vagueness on first amendment activity.
CONSEQUENCES FOR NEW ORGANIZATIONS
Unless the Americans United holding very materially broadens the access of newly formed charitable organizations to the courts, the consequences of the vagueness of the legislative restrictions will continue to be even more severe for such organizations.
PRACTICAL NECESSITY OF ADVANCE RULING
Confronted by the need to have advance Internal Revenue Service assurance of its Section 501(c) (3) and Section 170 qualification if it is to secure funding, the new organization will have to steer entirely clear of doubtful areas. While court review of an adverse Internal Revenue Service determination is theoretically available by the usual procedures of tax litigation, the process ordinarily proves longer than the organization is able to survive. The effect, generally, is the death of the organization. Unable to obtain funding for staff salaries and other expenses, those who wish to form the organization are compelled by the pressure of economic circumstances to abandon the idea, and the organization, and to turn to other endeavors.
The consequence is a strong incentive for the organization to avoid, at all costs, any proposed activity which might be thought to bring the legislative restrictions into play. Even if one is satisfied that the activity is permissible, its presence may delay the issuance of the ruling – and, therefore, the organization's initial funding – for longer than the creators of the organization can afford to wait. Here again, the chilling effect of the vague statutory standards on First Amendment expression is plain and considerable.
DELEGATION OF AUTHORITY TO IRS PERSONNEL
These circumstances give staff personnel at the Internal Revenue Service a broad area of practical control over the application of the legislative restrictions to newly formed organizations.
In somewhat different circumstances, the Supreme Court has held that the delegation of judgments under vague statutory standards to lower level administrative officials is not permissible under the first amendment. The principle of that holding seems directly in point.
ASSESSMENT OF VAGUENESS ATTACK
The private interest controlled by the legislative restrictions – freedom of expression – is one which the Supreme Court has been most willing to protect under the vagueness doctrine. The ambiguities of the restrictions are broad and unresolved by the regulations or other authority. The likelihood that many of the important decisions under these standards will be relegated to the administrative level would seem to increase suitability of the issue for resolution by application of the vagueness doctrine. The absence of a compelling government interest supporting the restrictions should also be influential.
Overall, consequently, the attack on the legislative restrictions for vagueness would seem to have considerable strength.
RECENT COURT ACTION
The Court of Appeals for the Tenth Circuit recently declined to hold the legislative restrictions unconstitutional. However, because of the focus of the case on the power of the Federal Government to restrict the free exercise of religion, the decision would seem to afford no reliable guide to the ultimate development of the law on the constitutional issues which we have been discussing.
In Christian Echoes National Ministry, Inc. v. United States, a non-profit religious organization sought a refund of social security taxes, asserting that it was entitled to its Section 501(c) (3) exemption despite a rather considerable program of appeals to the general public to take action upon legislative and political issues. Not questioning the District Court finding that the activities were a part of the religion represented by the organization, the Court of Appeals held that the Section 501(c) (3) and related legislative and political restrictions were not an abridgement of the free exercise of that religion. Although the Government had not commented on the point in its brief, the court held that these limitations did not invade the plaintiff's freedom of speech.
Over the years the Supreme Court has sustained a variety of government restrictions upon religious activities under the free exercise clause of the first amendment. Thus, the Tenth Circuit's holding on the free exercise issue is hardly surprising. While an unconstitutional conditions argument can be made out on this issue, paralleling the argument outlined here on the free speech issue, such an analysis does not appear to have been presented to the Tenth Circuit.
The freedom of speech issue was not briefed by either party. The court's discussion of it is short and includes no evaluation of the real force of the government interest in the restrictions, along the lines suggested here. The holding on the issue is arrived at without recognition of either the equal protection or vagueness argument.
At this writing, it is not clear whether Christian Echos will seek certiorari, and, of course whether certiorari will be granted if sought. In any event, the brevity and summary character of the court's analysis of the free speech issue would seem to make the holding of limited utility in predicting the ultimate course of the law on the constitutionality of the legislative restrictions.
PRIVATE FOUNDATION RESTRICTIONS: DIRECT REGULATION OF SPEECH
Private foundations are subject to special additional limitations on their ability to attempt to influence legislation. With certain exceptions, Section 4945, added to the Internal Revenue Code by the Tax Reform Act of 1969, imposes an initial ten percent excise tax on expenditures for the influencing of legislation, an additional 100 percent tax where the expenditures are not "corrected" within a "correction period," and further excise taxes where such expenditures are repeated. Under certain circumstances, excise taxes are also imposed personally on foundation managers who agree to the making of expenditures to influence legislation.
These special restrictions on private foundations constitute a clear effort by Congress to prohibit certain classes of legislative commentary by foundations. From what has been said about the application of first amendment protections to entities other than natural persons, it seems likely that the first amendment protection of free speech would be held applicable to private foundations, as well as to other classes of charitable corporations and trusts. Hence, if New York Times v. Sullivan and Garrison v. Louisiana establish unqualified protection for speech of "governing importance," the Section 4945 restrictions are unconstitutional.
If, on the other hand, the protection is not found to be prima facie unqualified, a court presented with the constitutional issue would have to evaluate the burden which the 1969 Act restrictions impose on foundations and the strength of the government interest in those restrictions.
BURDEN ON FOUNDATIONS
The burden of the restrictions, where they apply, is considerable. The pattern of penalty taxes established by the 1969 Act is designed not merely to chill, but to freeze altogether, the foundation legislative activities to which they apply. The first time a foundation makes an expenditure of the proscribed kind, it is subject to a modest tax measured by the amount of the expenditure. If the foundation does not "correct" the expenditure within the prescribed time – generally, by recovering the full amount expended – it is subject to an additional 100 percent excise tax. The second time the foundation steps across the line, there is an additional statutory provision doubling the penalty taxes for repeated violations.
TERMINATION TAX
Further, where a foundation makes several expenditures contravening the restrictions – perhaps over an extended period of time – it would seem to fall within the termination tax provisions of Section 507, under which a tax may be levied on the organization equal to the lesser of (a) the aggregate amount of the federal tax benefits which it and its donors have received over the entire period of its existence, plus interest, or (b) the foundation's net assets.
So long as the organization expending the prohibited sums is a "private foundation," these taxes apply whether or not it continues to be tax-exempt under Section 501(c) (3) and qualified to receive deductible charitable contributions under Section 170. In addition, "foundation managers" become subject to additional, personal penalty taxes for breach of the legislative restrictions under certain circumstances.
EFFECT FOR FOUNDATIONS
To term the impact of this many-layered structure of penalty taxes on foundation legislative communications "chilling" is much to understate the case. The purpose – and, undoubtedly, very largely the effect – is simply, directly, and entirely to rule out the proscribed sorts of foundation expressions on legislative matters.
GOVERNMENT INTEREST IN RESTRICTIONS
Is this regulatory scheme supported by a compelling government interest in preventing foundations from expressing legislative views? It is difficult to see that it is.
So far as I am aware, private foundations are the only class of institutions in the United States which the Federal Government attempts directly and entirely to prevent from stating views on legislative issues. Many categories of organizations, far from being foreclosed from legislative activity, are permitted to use tax-free funds to carry it on. Businesses, labor unions, trade associations, veterans organizations, fraternal beneficiary societies, social welfare organizations, and large charities which are not private foundations – all are in that class.
Moreover, even where they are not allowed tax-free resources to conduct legislative activities, businesses, labor groups, and individuals are not prevented from stating their views on legislation; they are merely required to use their own funds for the purpose.
SIZE AND LEGISLATIVE INVOLVEMENT OF FOUNDATIONS
Are the special, direct regulatory measures for foundations justified because foundations have particularly extensive resources, or a demonstrated proclivity to legislative involvement? Hardly.
While there is no completely accurate estimate of the total current value of private foundation assets, the amount is generally thought to fall in the range of $23 to $25 billion. Any reliable estimate places the total of assets at less than the annual budget of expenditures of the Department of Health, Education, and Welfare.
AMOUNT OF FOUNDATION EXPENDITURES
Even when the payout requirements of the 1969 foundation legislation become fully effective, annual foundation expenditures for exempt purposes will be required to total only about six percent of foundation investment asset value. If the $25 billion figure is an accurate approximation of investment asset value, the required level of expenditures would be $1.5 billion.
MOST FOUNDATION EXPENDITURES FOR NON-LEGISLATIVE PURPOSES
Of total annual foundation expenditures, the great bulk are for purposes no more ideological than putting college students through school, carrying on medical research, providing disaster relief, and supporting drama and the arts. Data collected by the Peterson Commission in 1969 showed that, among about 200 foundations surveyed for the period 1966-1968, only three-tenths of one percent of total grants were for the study of public policy issues and publication of the results.
COMPARISON WITH LEGISLATIVE EXPENDITURES OF BUSINESSES AND LABOR GROUPS
It seems probable that the Peterson Commission classification is substantially broader than the legislative restrictions of Section 4945. Even if not, it seems clear that the aggregate annual amount which foundations expended on legislative subjects before the 1969 Act rules became effective is very small indeed when one compares it with the amounts which businesses and labor groups devote to the direct pursuit of legislative goals.
The petroleum industry's current advertising campaign on the energy crisis – reported by the Washington Post to cost $3 million – is by itself probably sufficient to match all foundation expenditures which would have been taxable under the Section 4945 rule had it applied in 1969.
When one adds the legislative expenditures of other extractive industries, the aerospace industry, the defense industry, automobile manufacturers, railroads, medical groups and others concerned with health care, labor unions, farm groups, and the multitude of other industries and organizations which participate freely, regularly, and extensively in attempting to influence legislation – and which together possess resources many times as large as those of foundations – one can only conclude that neither the quantitative level of foundation funds nor the extent of their legislative involvement makes out the presence of a compelling government interest in singling them out from all other U.S. institutions for the special Section 4945 restrictions.
EVIDENCE PRESENTED TO CONGRESS IN 1969
The evidence upon which the Ways and Means Committee acted in 1969 in framing the Section 4945 rule is not contrary to this conclusion. No more than a dozen cases of legislative activity by private foundations were presented to the Committee. The total of the expenditures involved in all was not large. The Committee had before it no overall data on the extent of foundation participation in legislative matters. One searches the record of the Committee's hearings, and its report accompanying the legislation, in vain for any factual demonstration of a compelling government interest in prohibiting legislative expressions by foundations.
COMMITTEE REPORT RATIONALE
The Committee Reports disclose that the Section 4945 rule sprang from Congressional unwillingness to rely upon the Section 501 (c) (3) legislative restriction – and its tolerance of some legislative activity – for charitable organizations which are not subject to the discipline of public support. Congress devised the new, stringent restrictions for charities deriving their funds from one donor or a small group of donors. A critic has recently placed essentially the same ground for concern about foundations in slightly different terms, arguing that they are the proper subject of special scrutiny because they "lack constituencies."
One may agree or disagree with this point; but it is difficult to find in it a constitutionally acceptable government interest in restricting foundations' freedom of expression. Surely a key aim of the First Amendment was to protect the expression of views by minorities. The application of special restrictions to the First Amendment activity of narrowly based organizations – because they are narrowly based – would seem squarely contrary to that purpose.
The Supreme Court decision in Grosjean v. American Press struck down a tax on newspaper advertising as an unconstitutional burden on First Amendment activity. The taxes flowing from contravention of Section 4945(d) (1) are a more direct, and much more stringent, effort to foreclose such activity. Because of the apparent absence of a constitutionally acceptable government interest supporting these restrictions, there would seem at least substantial possibility of their falling when they come under constitutional attack.
A LOOK AHEAD: THE COURTS AND CONGRESS
As the courts are presented with the question of the constitutionality of the exemption and deduction limitations on charities' legislative activities, they will undoubtedly be influenced by the fact that those restrictions have been in effect for a number of years. They may also be influenced by the size of the class of organizations to which the restrictions apply. While neither consideration is directly relevant to the legal issues presented by the constitutional attack, both can be expected to make the courts reluctant to hold the legislative restrictions invalid.
On the other hand, one must recognize that the restrictions deal with activities which do not lie on the periphery of the First Amendment. They have the direct effect of constricting the speech of institutions which, by their very nature, are necessarily concerned with matters of public interest and public importance; and they limit the ability of those institutions to express their views upon the laws which govern our society. It would be difficult to imagine a class of expression more clearly within the center of the first amendment.
Consequently, the next step in the development of the law here may be invalidation of the legislative restrictions. Such a result would not necessarily mean the end of all restrictions on tax support for organizations involved in legislative activities. It would, however, return to Congress the task of developing restrictions on such activities which are consistent with first amendment protections. In light of the importance and constitutional sensitivity of the interests with which the restrictions deal, refinement of the rules, accommodating them to constitutional protections seems highly desirable.
[Footnotes Omitted]
[From the Evening Star and Daily News, Apr. 30, 1973]
LOBBYING TAX PLAN SOUGHT
(By Ross Evans)
A public-interest law firm and its lobbying arm, in a suit to be filed today, are seeking the right to lobby Congress despite the fact they are supported by tax-deductible contributions.
The suit, to be filed in U.S. District Court here by Tax Analysts and Advocates (TAA) and its affiliated lobby, Taxation With Representation (TWR), hopes to invalidate on 1st- and 5th- Amendment grounds a law which prohibits "substantial" lobbying by organizations supported by deductible contributions.
In order to receive deductible contributions, TAA spun off its lobbying activities in 1970 to separately incorporated TWR, which has the same nondeductible tax status as other public- interest lobbies, such as Common Cause. Both TAA and TWR are exempt from paying taxes themselves.
The suit would enable public-interest lobbies to claim the advantages of deductible charity status which would include currently prohibited support from foundations, reduced postal rates and a "governmental seal of approval" popularly attached to deductible grass-roots contributions, according to Thomas F. Field, executive director of both TAA and TWR.
Field said he used to be a "purist" who did not back use of tax advantages by public-interest groups, particularly tax-reform groups like his own. But he said be changed his mind because TAA "would not have survived financially" without its deductible status.
Former Sen. Fred R. Harris, D-Okla., is an admitted "purist." His new Populist Action lobby does not claim tax exemption for itself or deductions for its contributors, and his long-range goal is to eliminate tax breaks for all lobbies, public and private. But Harris acknowledged recently that he is "sympathetic in the short run" to efforts by public-interest groups to claim the advantages currently enjoyed by business lobbies whom they often oppose.
Business contributions to trade lobbies have been deductible as a business expense since 1962. The Internal Revenue Service does not know the amount of these deductions, since they are lumped together with miscellaneous items on corporate income tax forms. Field said the figure may run as high as $1 billion a year, almost half of it absorbed by the Treasury.
The House Ways and Means Committee killed a bill last year which would have defined as "substantial" lobbying by charitable groups such as TAA the spending of more than 20 percent of their funds for this purpose. The Nixon administration objected to the provision, while endorsing the effort to set a standard in principle.
[From the Philanthropy Monthly, May 1973]
THE ULLMAN BILL – TRYING AN END RUN
Tax Analysts v. Shultz represents an effort by a group of Washington lawyers to void existing restrictions on legislative activity by tax exempt charitable and educational groups. It also seeks to establish tax deductibility for dues and contributions paid to "public interest lobbies" such as Common Cause and Taxation with Representation.
The group, Tax Analysts and Advocates, already boasts a handsome record of accomplishments. In part through their efforts the IRS has made public the sections of the Internal Revenue Manual dealing with Operating Instructions for Rulings Personnel in connection with Exempt Organizations.
The current effort relates to the problems of non-profit organizations which may wish to engage in lobbying. The present statute says only that such activity for public charities may not be "substantial", a term that has never been defined. The Ullman bill, introduced in 1972, at which time public hearings were held (See May, 1972 REPORT) seeks to remedy such problems by clarifying legislation. However the Ullman bill is not moving perceptibly and in the present antiphilanthropic climate awaits a dubious fate in any case.
Therefore Tax Analysts and Advocates is seeking a solution in the courts. This is not necessarily a matter of deliberate choice. Were they to wait for legislative clarification, they face the possibility of liquidation first. This crucial dependence on tax deductibility for support is one of the points of the suit.
Thomas F. Field, executive director of the organization, pointed out when filing the complaint on April 30th that tax exempt business leagues, trade associations, labor unions, agricultural groups, chambers of commerce, fraternal societies, and veteran organizations are all free to lobby as much as they wish – and they can use tax deductible funds for that purpose.
"The result" according to Mr. Field, "is to muzzle charitable and educational groups when they seek to speak out on legislative matters in the public interest, while giving free rein to lobbying efforts by groups serving narrower pocketbook interests. In our view, this is not just bad policy, but a clear violation of the First Amendment's guarantees of freedom of speech and association and the Fifth Amendment's guarantee of equal protection of the laws".
Tax Analysts and Advocates are especially interested to hear from other groups which have been particularly damaged by not being able to lobby. Such organizations might want to make contact with Tax Analysts and Advocates, at 732 Seventeenth Street, N.W., Washington, D.C. 20006.
[In the U.S. District Court for the District of Columbia]
COMPLAINT FOR DECLARATORY AND INJUNCTIVE RELIEF THREE JUDGE COURT
REQUESTED
Tax Analysts and Advocates, 732 Seventeenth Street,. N.W., Washington, D.C. 20006 (202) 298-5556 and Taxation With Representation, 2369 North Taylor Street, Arlington, Virginia 22207 (703) 527-2605, v. George P. Shultz, Secretary of the Treasury, 15th Street at Pennsylvania Ave. N.W., Washington, D.C. 20220 (202) 964-2533 and Johnnie M. Walters, Commissioner of Internal Revenue, 1111 Constitution Avenue, NW., Washington, D.C. 20224 (202) 964-4115: Civil Action No. -.
1. This is an action to declare unconstitutional, null and void and unenforceable, portions of Secs. 501(c) (3) and 170(c) (2) of the Internal Revenue Code (the Code), and the related estate and gift tax provisions of Secs. 2055, 2106, and 2522 of the Code, as violative of Article I, Section 1 of, and the First and Fifth Amendments to the Constitution of the United States; to enjoin defendants from continued enforcement of these provisions and of all applicable regulations and rulings promulgated thereunder; and to obtain listing for plaintiff Taxation with Representation (TWR) in defendants' publication Cumulative List, Organizations Described in Section 170(c) of the Internal Revenue Code (the Cumulative List).
SUPPLEMENTAL STATEMENT OF POINTS AND AUTHORITIES IN SUPPORT OF PLAINTIFFS' APPLICATION FOR CONVENING OF A THREE-JUDGE
COURT 1
(In the U.S. District Court for the District of Columbia: Tax Analysts and Advocates, et al., Plaintiffs, v. George P. Shultz, Secretary of the Treasury, et al., Defendants; Civil Action No. 833-73)
STATEMENT
This case challenges the constitutionality of those portions of the Internal Revenue Code ("the Code") (26 U.S.C.), which abridge the rights of speech, petition, press, and due process of charitable and educational organizations.
In general, the Code requires tax-exempt charitable and educational organizations to refrain from any "substantial" legislative activity. Charitable and educational organizations which seek to influence legislation lose their tax-exempt status and their qualification to receive tax-deductible contributions. In practice, loss of these tax privileges is usually fatal to the organization. By contrast, tax-exempt business leagues, chambers of commerce, trade associations, labor unions, fraternal and veterans groups and others may lobby without restriction, while remaining tax- exempt and fully eligible to receive tax-deductible payments and contributions.
The question of the validity of the existing statutory restrictions on legislative activity by charitable and educational organizations presents a substantial constitutional issue. Accordingly, a three-judge court should be convened.
THE STATUTORY FRAMEWORK
Sec. 501(c) of the Code exempts the following groups, among others, from income tax:
Section 501(c) (3) : "Corporations organized and operated exclusively for charitable ... or educational purposes ... no substantial part of the activities of which is carrying on propaganda, or otherwise attempting to influence legislation (Emphasis added)
Section 501(c) (4): Civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare ...
Section 501(c) (5) : Labor, agricultural, or horticultural organizations.
Section 501(c) (6) : Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues
Section 501(c)(8): Fraternal beneficiary societies, orders, or associations
Section 501(c) (10) : Domestic fraternal societies, orders, or associations
Section 501(c) (19) : A post or organization of war veterans
Other provisions of the Code (and the pertinent Internal Revenue Service administrative rulings) allow the organizations described above, and others, to receive funds which are tax-deductible by the payer or donor even though the funds are used for lobbying. For example, Sec. 162 (a) of the Code, and the administrative rulings thereunder, grant taxpayers a trade or business expense deduction for dues payments made to labor unions and similar groups which are tax-exempt under Sec. 501(c) (5), even though all or some portion of the payments may be used for attempts to influence legislation. And Sec. 162(e) of the Code, as added by the Revenue Act of 1962, grants individual and corporate taxpayers a trade or business expense deduction for payments to business leagues, chambers of commerce, trade associations, and similar groups which are tax exempt under Sec. 501(c)(6), provided that the payment is used to influence legislation directly related to the taxpayer's trade or business. As a final example, Sec. 170 (c) (3) and (4) of the Code grants taxpayers a charitable deduction for payments to veterans organizations and fraternal societies, even though all or some portion of the payment may be used in attempts to influence legislation.
By contrast, Sec. 170(c) (2) of the Code, and the related estate and gift tax provisions of Secs. 2055, 2106, and 2522, deny taxpayers a deduction for payments made to charitable and educational groups such as Tax Analysts and Advocates, unless the group insures that "no substantial part" of the activities of the organization consists of "carrying on propaganda, or otherwise attempting, to influence legislation." No section of the Code grants taxpayers a deduction for payments made to social welfare organizations like Taxation with Representation which seek to influence legislation in the public interest.
PLAINTIFFS
Tax Analysts and Advocates (TAA) is a charitable and educational group incorporated in 1970 under the District of Columbia Nonprofit Corporation Act. The Internal Revenue Service (IRS) has ruled that TAA is exempt from all federal taxes under Sec. 501 (c) (3) of the Code and is qualified to receive tax-deductible contributions. TAA educates the public and the news media on tax issues, principally by publishing a weekly tax news magazine, called Tax Notes, for financial journalists throughout the United States. It also conducts a public interest law practice, which includes participation on behalf of the general public in IRS administrative hearings on tax matters.
Taxation with Representation (TWR) is a charitable and educational organization also incorporated in 1970 under the District of Columbia Nonprofit Corporation Act. The IRS has ruled that TWR is exempt from income tax, but not social security and unemployment taxes, as a Sec. 501(c) (4) "social welfare" organization. The IRS has also ruled that TWR is not eligible to receive tax-deductible donations. Revenue Ruling 71530.1971-2 Cum. Bull. 237. TWR's charitable and educational purposes are to serve the common good and social welfare of the people of the United States by assisting teachers of economics and tax law in presenting their views to Congress regarding tax legislation. In general, TWR performs the same charitable and educational activities with respect to Congress as TAA performs in the courts and the Executive Branch.
ARGUMENT: THE REQUIREMENTS FOR CONVENING THREE-JUDGE COURT
The tests to be employed when deciding whether a case is appropriate for a three-judge court have been formulated in the following way by the Supreme Court:
"When an application for a three-judge court is addressed to a district court, the court's inquiry is appropriately limited to determining whether the constitutional question is substantial, whether the complaint at least formally alleges a basis for equitable relief, and whether the case presented comes within the requirements of the three-judge statute." Idlewild Bon Voyage Liquor Corp. v. Epstein, 370 U.S. 713, 715 (1962)
Judged by these standards, a three-judge court is clearly required in the present case. The remainder of this memorandum will show why each of the tests established by the Supreme Court is fully satisfied. The discussion will focus initially on the two procedural points, and will conclude by showing the substantially of the Constitutional questions presented by this action.
(1) The Complaint in This Action Alleges a Basis for Equitable Relief.
Paragraphs 13 through 26 of the complaint state the injuries suffered by plaintiffs in consequence of enforcement of the challenged statutes. TAA is prevented from performing its role as an effective advocate of the public interest in tax reform because it cannot carry on legislative activities. TWR may be forced out of existence because of the unavailability of tax-deductible donations.
Paragraphs 27 through 32 state the claims for relief of the plaintiffs, followed by the specific equitable relief requested. Paragraph 32 of the complaint affirms that plaintiffs are suffering irreparable injury and have no adequate legal remedy.
The absence of a legal remedy in the present case contrasts with the normal situation in a tax dispute. In the usual case, a taxpayer can contest a deficiency assessment in the Tax Court, or he can pay the tax and sue for a refund in the District Court or in the Court of Claims. These normal routes for tax litigation are designed for situations in which the taxpayer differs with the government over his liability for tax or the amount of tax owed.
This is not the situation here. TAA is not required to pay any kind of Federal tax, and does not.
TAA is therefore unable to contest a deficiency assessment in the Tax Court or to sue for a tax refund. TWR pays social security and unemployment taxes, as it is required to do by the rules relating to social welfare organizations, but it is not resisting the collection or payment of those taxes; TWR intends to continue to pay them as required by law. Therefore, TWR is not in a position to take the Tax Court, District Court, or Court of Claims routes to obtain resolution of the questions presented by this case. Indeed, it would be strange if taxpayers were forced to raise arguments about the payment of taxes which they do not owe – or to whose payment they do not object – in order to obtain adjudication of Constitutional questions which have no relationship to the challenged taxes.
In Protestants and Other Americans United for Separation of Church and State, Inc. v. Walters, C.A. No. 71-1299, Jan. 11, 1973, - U.S. App. DC, - F2d -, reported by Commerce Clearing House, 73-1 United States Tax Cases (U.S.T.C.), par. 9165, p. 80,215, the Court of Appeals for the District of Columbia adopted the view that Constitutional questions such as those involved in the present case should be presented directly to a three-judge court. The Court of Appeals also held that it is not necessary to attempt to cast such questions in the form of a refund suit or Tax Court contest. Americans United therefore disposes of any claim that 28 U.S.C. Sec. 2201 and Sec. 7421 (a) of the Code bar the present suit on the ground that a legal remedy is available.
Accordingly, the District Court need not reach those statutory issues here. As Americans United makes clear, the plaintiffs in the present case simply do not have a legal remedy for the injuries suffered by them as a result of the unconstitutional restrictions imposed on their activities. Their only remedy is to obtain equitable relief.
Thus the first requirement for convening a three-judge court is fully satisfied here.
(2) This Action Complies with the Other Procedural Requirements for Convening a Three-Judge Court
The purpose of the three-judge court provision (28 U.S.C. 2282) is to prevent a single United States District Court judge "from being able to paralyze totally the operation of an entire regulatory scheme. ." Kennedy v. Mendoza-Martinez, 372 U.S. 144, 154 (1963). In interpreting the predecessor to Sec. 2282, the Supreme Court held that the decision as to whether a three-judge court is necessary depends upon the presentation of an application for an injunction which would operate totally to restrain the enforcement of a federal statute and not on the mere drawing into question the constitutionality of an enactment. International Ladies' Garment Workers' Union v. Donnelly Garment Co., 304 U.S. 243, 250 (1938). As the Court said in Flemming v. Nestor, 363 U.S. 603, at 607 (1960):
"[A three-judge court action must] seek affirmatively to interdict the operation of a statutory scheme. [It must] put the operation of a federal statute under the restraint of an equity decree" (brackets added.)
This case complies fully with this requirement. The complaint in this action seeks totally to restrain the enforcement of a restrictive statutory scheme which is embodied in the income, estate and gift tax provisions of the Internal Revenue Code. This complaint requests a "permanent injunction restraining the enforcement, operation [and] execution of [an] Act of Congress for repugnance to the Constitution of the United States" (28 U.S.C. 2282). Judgment for plaintiffs on the merits of this case would require such an injunction. This relief may not be granted until the case is heard and determined by a three-judge court.
The restrictive provisions of the Code, which are being enforced by the defendants, are the object of the injunction sought in the instant case. But plaintiffs seek to do more than merely enjoin the defendants' enforcement of the law as to the specific plaintiffs here. It is not merely the result, the effect, or the execution of the statutes which is being challenged. The statute itself is under attack. Consequently, the instant complaint fully fulfills the requirements of Krebs v. Ashbrook, 275 F. Supp. 111, 118 (D.D.C.) (1967), aff'd 132 U.S. App. D.C. 176, 407 F2d 306, cert. den. 393 U.S 1026, which held that "To come under Sec. 2282, the Act of Congress or operations under it must be the direct object of the injunction sought." See also Flemming v. Nestor, 363 U.S. 803, 607.
The second of the three tests for convening a three-judge court is therefore fully satisfied.
(3) The Constitutional Questions Presented by this Case are Substantial and of the Kind Requiring the Convening of a Three-Judge Court.
In determining whether a question is substantial, the Supreme Court has articulated the following criteria: A question may be insubstantial "either because it is 'obviously without merit' or because 'its unsoundness so clearly results from the previous decisions of this Court as to foreclose the subject and leave no room for the inference that the question sought to be raised can be the subject of controversy."' Ex parte Poresky, 290 U.S. 30, 32 (1933) (challenge to Massachusetts compulsory automobile liability insurance law held insubstantial in view of prior decisions of the Court). And see California Water Service Co. v. City of Redding, 304 U.S. 252 (1938). The Poresky Court also stated that "the complainant should not be denied opportunity to be heard in the prescribed manner upon a question that is fairly open to debate...." 290 U.S. at 32. And see Harrell v. Board of Commissioners, 269 F. Supp. 919 (D.D.C. 1967) (the question presented was not "reasonably debatable" and the three-judge court application was therefore denied).
All of the issues presented in the plaintiffs' case are constitutional in nature. The issues are set out as claims for relief in the complaint, paragraphs 27 through 32.
Stripped to its barest essentials, the constitutional problem is that the law forbids attempts by the plaintiffs to influence legislation with tax-deductible payments and contributions, and permits other tax-exempt organizations, including business groups, labor unions, and fraternal and veterans groups, to do just that. The several claims for relief present various aspects of this basic problem. This constitutional problem has recently been explored in detail in Troyer, "Charities, Law-Making, and the Constitution: The Validity of the Restrictions on Influencing Legislation", 31 New York University Institute on Federal Taxation 1415 (1973).
This problem clearly is of the degree of substantiality as to require the convening of a three-judge court. In Americans United, supra, the Court of Appeals held that the portion of Section 501 (c) (3) of the Code which prohibits legislative activity is subject to a substantial constitutional challenge based upon the legal theory that it discriminates against one group of charities and in favor of another group of charities. In that case the discrimination complained of by plaintiff, a small charity, was that larger charities appear to be allowed more legislative activity under the "substantiality" test of Section 501(c) (3) than are smaller groups. Here the discrimination is even grosser, because the favored business, labor and other groups are allowed unlimited legislative activity, while the present plaintiffs – who are in all relevant respects similarly situated to the favored groups – are effectively prohibited from engaging in any legislative activity, while the present plaintiffs – who are in all relevant respects similarly situated to the favored groups – are effectively prohibited from engaging in any legislative activity.
Plaintiffs believe that Americans United is a controlling precedent which clearly demonstrates that the constitutional issues involved here are so substantial as to warrant the convening of a three-judge court. However, to demonstrate that this is so, we will briefly review the constitutional issues present in this case.
(a) The challenged statutes improperly require Tax Analysts and Advocates to relinquish First Amendment rights in order to be eligible for favored tax status.
This problem, relating to paragraph 27 of the complaint, is an example of the doctrine of unconstitutional conditions. This doctrine has been summarized in the following way in a recent Harvard Law Review article:
"Essentially, this doctrine declares that whatever an express constitutional provision forbids government to do directly it equally forbids government to do indirectly. As a consequence, it seems to follow that the first amendment forbids the government to condition its largess upon the willingness of the petitioner to surrender a right which he would otherwise be entitled to exercise as a private citizen. The net effect is to enable an individual to challenge certain conditions imposed upon [a governmental benefit] without disturbing the presupposition that he has no 'right' to that [benefit]." Van Alystyne, "The Demise of the Right-Privilege Distinction in Constitutional Law," 81 Harv. L. Rev. 1439, 1445 (1967-68).
The Supreme Court has applied this rule in a wide variety of cases during the past two decades. For example, it has been held that unemployment benefits cannot be denied to a person who refuses to work on Saturday because his religion designates Saturday as the sabbath (Sherbert v. Verner, 374 U.S. 398 (1963)). It has also held that public employment cannot be denied in cases in which an employee refuses to refrain from exercising his constitutionally protected right of free speech (Keyishian v. Board of Regents, 385 U.S. 589 (1967) ). Nor can a public school teacher be discharged for invoking the privilege against self-incrimination (Slochower v. Board of Education, 350 U.S. 551 (1956)) or an attorney be disbarred for invoking that privilege (Spevack v. Klein, 385 U.S. 511 (1967)). In each of these cases it has been held to be unconstitutional to condition enjoyment of a government benefit on a surrender of Constitutionally protected rights.
Even more closely in point for present purposes is the Supreme Court decision in Speiser v. Randall, 357 U.S. 513 (1958). In that case, the Court held that California could not condition a veteran's property tax exemption on the veteran's agreement to take an oath not to advocate overthrow of government. The language of the decision (Id. at 518) is instructive:
"It is settled that speech can be effectively limited by the exercise of the taxing power. Grosjean v. American Press Co., 297 U.S. 233, 56 S. Ct. 444, 80 L.Ed. 660. To deny an exemption to claimants who engage in certain forms of speech is in effect to penalize them for such speech. The appellees are plainly mistaken in their argument that, because a tax exemption is a 'privilege' or 'bounty', its denial may not infringe speech."
So, here, it is a mistake to argue that because tax exemption is a privilege, Tax Analysts and. Advocates may therefore be required to give up its rights of speech, press, and petition. The numerous Supreme Court opinions just cited render that argument highly suspect and raise a substantial constitutional question, requiring convening a three-judge court.
(b) The challenged statutory restrictions are impermissibly vague; the vague language is particularly objectionable because it chills the exercise of First Amendment rights. This issue relates to paragraphs 28 and 29 of the complaint which set forth the plaintiff's second and third claims for relief.
It is firmly established that due process requires certainty in statutes. Dombrowski v. Pfister, 380 U.S. 479 (1965); Cramp v. Board of Public instruction, 368 U.S. 278 (1981); Baggett v. Bullitt, 377 U.S. 360 (1964); Champlin Ref. Co. v. Corporation Comm'n., 286 U.S. 210 (1932) ; Cline v. Frink Dairy Co., 274 U.S. 445 (1927) ; Connally v. General Const. Co., 269 U.S. 385 (1926) ; U.S. v. L. Cohen Grocery Co., 255 U.S. 81 (1921). Likewise it is firmly established that "[even] stricter standards of permissible statutory vagueness may be applied to a state having a potentially inhibiting effect on speech; a man may the less be required to act at his peril here, because the free dissemination of ideas may be the loser." Smith v. California, 361 U.S. 147, 151 (1959). See also Interstate Circuit v. Dallas, 390 U.S. 676 (1968); Ashton v. Kentucky, 384 U.S. 195 (1966); Baggett v. Bullitt, supra.
Vagueness impinging on speech is suspect not only because it prevents a statute from giving notice of its meaning, but also because the vagueness itself chills the exercise of First Amendment rights. A current formulation holds that "where a vague statute abut[s] upon sensitive areas of First Amendment freedoms, it operates to inhibit the exercise of [those] freedoms. Uncertain meanings inevitably lead citizens to steer far wider of the unlawful zone ... than if the boundaries of the forbidden areas were clearly marked." Grayned v. City of Rockford, 408 U.S. 104 (1972) (Justice Marshall, writing for Justices Brennan, Stewart, White, Powell and Rehnquist, and Chief Justice Burger) (brackets in original; quotation marks and footnotes omitted).
This case presents a classic example of the chilling effect that a vague statute can have on the exercise of First Amendment freedoms. As the complaint in this case indicates, Section 501(c) (3) of the Code prohibits any "substantial ... activities which [consist of] carrying on propaganda or otherwise attempting, to influence legislation." (brackets added). That statute, both on its face and as interpreted administratively by the IRS, is impermissibly vague under the strict First Amendment standards as well as under due process standards. As the complaint in this case indicates, the vagueness of Section 501(c) (3) is having the undesirable effect feared by the Supreme Court. This is true not only in the case of the plaintiffs themselves but also in the case of many other charitable and educational organizations which are subject to the same statutory scheme.
Defendants' regulations, promulgated pursuant to the statutes challenged, have done nothing to lessen the vagueness of the law. While the regulations spell out with some particularity what constitutes propaganda and other legislative activity, there is no regulation which attempts to explain what is meant by "substantial". See 26 C.F.R. 1.501 (c) (3)-1(b) and (c), passim. Nor is there any judicial decision which has been acquiesced in by the defendants that clarifies the statutory language. In fact, the IRS itself has conceded the difficulty of interpreting the law; its own Exempt Organizations Handbook, prepared to give official guidance to IRS employees, states:
"In determining substantiality, it is sometimes difficult to determine what supporting activities shall be included with the proscribed attempts to influence legislation ... There is no simple rule as to what amount of activities is substantial. The one case on this subject is of very limited help. Exempt Organizations Handbook, Part XI, Internal Revenue Manual (11) 671, Sec. 764.
The vagueness issue by itself presents a substantial constitutional question which makes a three-judge court necessary to hear the merits of this action.
(c) The challenged statutes subject both plaintiffs to an arbitrary classification which improperly burdens their First Amendment rights, in violation of the equal protection standards of the Fifth Amendment.
This issue is raised by the fourth and fifth claims for relief which are set forth in paragraphs 30 and 31 of the complaint.
As noted earlier, the tax laws distinguish sharply between two groups of organizations, both of which are exempt from tax. One group, consisting of business leagues, trade associations, chambers of commerce, labor unions, agricultural groups, veterans and fraternal organizations, and others, is eligible to receive payments and donations which qualify the payor or donor for a tax deduction. The organizations in this group are also free to engage in lobbying activities without restriction.
In the second group, to which both plaintiffs belong, are organizations that are forced to make a difficult and undesirable choice. They can, like TAA, receive deductible donations, but they must then refrain from all but insubstantial efforts to influence legislation. Or, like TWR, they can carry on legislative activities, but they must then support their activities with donations which are not tax-deductible by the donors. As a result, it is very difficult – and sometimes impossible – to raise the funds that these groups need to represent the public interest in competition with business, labor, and other groups that enjoy both tax-exemption and tax-deductibility for their receipts. This clearly discriminatory treatment is only sustainable if the government can establish a compelling governmental interest to warrant this burdening of plaintiffs' exercise of their fundamental constitutional rights of free speech, press and petition. Dunn v. Blumstein, 405 U.S. 330 (1972) ; Bullock v. Carter, 92 S. Ct. 849 (1972) (Chief Justice Burger, writing for a unanimous court) ; Shapiro v. Thompson, 394 U.S. 618 (1969); U.S. v. O'Brien, 391 U.S. 367 (1968); Harper v. Va. Bd. of Elections, 383 U.S. 663 (1965) ; Sherbert v. Verner, supra; NAACP v. Button, 371 U.S. 415 (1963); Bates v. Little Rock, 361 U.S. 516 (1960) ; Thomas v. Collins, 323 U.S. 516 (1945) ; Korematsu v. U.S., 323 U.S. 214 (1944); Skinner v. Oklahoma, 316 U.S. 535 (1942).
On its face the discrimination between business, labor and other groups, on the one hand, and charitable and educational groups, on the other, is arbitrary and unjustifiable. The charters and stated purposes of plaintiffs, and of many other charitable and educational organizations, give them a legitimate interest in expressing their opinion to the legislatures. But they are prevented from doing so, while other tax-exempt groups can. Business and labor groups have similar legislative interests, although their legislative activities are liable to be more narrowly focused than the plaintiffs' and to be mainly concerned with promoting the immediate pocketbook interests of their members.
For example, chambers of commerce and trade associations (which are tax-exempt under Section 501(c) (6) of the Code) often lobby with tax-deductible funds in favor of proposed legislation which would lower the tax burden on their members, thus shifting a portion of the overall tax burden to others. Plaintiff TAA is prevented by the Code's restrictions on legislative activity from opposing this shifting of tax burdens. Plaintiff TWR is free to represent the public interest in such cases, but, without the availability of tax-deductible contributions, it does not have the resources to carry on its work.
A thorough search of the legislative history of the lobbying prohibition in Section 501(c) (3) of the Code fails to disclose any compelling governmental interest in this discriminatory classification of tax-exempt groups. And where, as here, no overriding government interest exists to justify a statutory discrimination, the statute cannot stand.
The arbitrariness of the Internal Revenue Code's classification of tax-exempt groups with respect to their legislative activity raises a substantial constitutional question, requiring resolution by a three-judge court.
(d) The challenged statutes are unconstitutionally overbroad; their sweeping language imposes restrictions on First Amendment freedoms far beyond the range of any compelling governmental interest.
Even if the government were to carry its burden of demonstrating the necessary compelling interest to justify the statutory scheme here attacked, it must nevertheless refrain from regulating broadly in areas beyond the range of such interest. United States v. Robel, 389 U.S. 258 (1967) ; Keyishian v. Board of Regents, supra; Elfbrandt v. Russell, 384 U.S. 11 (1966); Baggett v. Bullitt, 377 U.S. 360 (1964) ; NAACP v. Button, 371 U.S. 415 (1963) ; Shelton V. Tucker, 364 U.S. 479 (1960). And whenever First Amendment freedoms are regulated, the government must be able to demonstrate that no less restrictive alternative would be sufficient to accomplish its legitimate end. Sherbert v. Verner, supra.
It is difficult to imagine any compelling interest which the government might have in prohibiting all but insubstantial lobbying by charitable and educational organizations. It is true that there is a governmental interest in prohibiting illegal, unethical or improper conduct by lobbyists. But that interest has nothing to do with the present case. A separate statutory framework has been designed to serve this important but narrow interest. See, for example, 2 U.S.C. Sees. 261-270, which requires registration of lobbying organizations.
In contrast to necessary registration and regulation statutes, the statutory scheme under attack in the present case serves no legitimate government interest. Indeed, it undermines sound public policy by stripping large numbers of charitable and educational groups of their fundamental freedoms of speech, press, petition, to the public detriment.
CONCLUSION
Accordingly, plaintiffs request the Court to approve their motion for appointment of a three- judge court.