In the News

Constitutional Law: The Gober Group Sues IRS Over Constitutionality of Tax Exempt Determination Process

Friday, December 9, 2016

The Gober Group is lead counsel for Freedom Path, one of the organizations bogged down in the IRS’s targeting of conservative groups. Freedom Path is suing the IRS, alleging that the IRS’s process for determining whether a nonprofit organization is engaged in political activity or in issue advocacy is unconstitutional. This case, the first of its kind to reach the merits of the question, has recently completed briefing in the U.S. District Court in Dallas, TX and we hope to have a decision before the middle of 2017.

The following is a guest post excerpted from an email written by Barnaby Zall, one of the leading attorneys in the tax-exempt organizations space, summarizing the case. He practices at the Law Office of Barnaby Zall.

Here’s a quick update on a pending case that’s gone mostly under the radar, but has the potential to be an earthquake in the ability of the IRS to regulate political speech and association. Freedom Path v. Lois Lerner, No. 3:14-CV-1537-D (N.D.Tx). Note: I’m not part of the case, but I’ve been following it.

In 2011, Freedom Path applied for tax-exemption as a 501(c)(4) organization, and was immediately ensnared in the IRS scandal. It filed suit in federal court in Dallas, and having survived motions to dismiss for mootness and standing, has now moved for partial summary judgment on its challenge to the IRS’s use of a “facts and circumstances” methodology to determine whether it is engaged in political campaign intervention or, as Freedom Path claims, issue advocacy.

The IRS’s “facts and circumstances” test has been applied for decades, and is basically a “know it when you see it” test that permits an individual IRS employee to determine, based on all the facts and circumstances of a situation, whether an organization is engaged in political or non-political activity (the test is also used in a variety of other situations, usually not involving core First Amendment rights). The IRS has never been able to articulate a simple compliance test, and usually ends up offering multiple “examples” and repeating the facts and circumstances test. In my training and classes, I suggest a “Three T’s” test: the IRS decision between political and issue advocacy depends on a shifting set of three factors: Timing, Targeting and Text. How close to an election? Was the advocacy directed to an electorate? Did the text deal with an issue or with an individual, particularly an individual’s character or fitness for office? But there’s always the facts and circumstances test under which the IRS can make any choice it pleases, no matter the argument made by the taxpayers. In other words, there’s never any certainty about what the IRS will do.

The facts and circumstances test has been roundly criticized, including by the Bright Lines Project, which proposed replacing the test (except for about ten percent of organizations) with “bright line” rules supposedly more easily understood. After the IRS scandal, the IRS proposed new regulations defining campaign-related political activity in ways similar to the Bright Lines proposal, but after receiving hundreds of thousands of opposing public comments, withdrew the proposal, and Congress has since barred the Treasury from re-issuing the proposal. During the course of the IRS scandal and after, Congress, outside groups, and the IRS and Treasury themselves repeatedly described the facts and circumstances test as ambiguous, confusing and impossible for lay persons to understand and comply with. See, e.g., then-IRS Commissioner Danny Werfel’s Charting a Path Forward At The IRS, June 24, 2013, P. 28.

This case is the other shoe dropping.

The legal theory behind the challenge, articulated, inter alia, by Chris Gober of the Gober Group and Jason Torchinsky of Holtzman Vogel Josefiak Torchinsky, is pretty simple: if the IRS itself has declared its own rules ambiguous and too confusing for compliance, aren’t those rules unconstitutional under the First Amendment’s rights of speech and association? After all, the Supreme Court laid down some clear and straightforward rules in FEC v. Wisconsin Right to Life, 551 U.S. 449 (2007), essentially all of which are violated by the facts and circumstances test, and the IRS’s rules violate the Supreme Court’s ruling against the FEC’s “two-part, twelve factor” test for issue advocacy in Citizens United v. FEC, 558 U.S. 310 (2010).

The traditional IRS defense is that the IRS is entitled to ignore the First Amendment because it administers a “tax subsidy” and the Treasury must stand apart from subsidizing political speech. Regan v. Taxation With Representation of Washington, 461 U.S. 540 (1983). But in recent years that defense has broken down, most famously in Z Street v. Koskinen, 791 F.3d 24 (D.C. Cir. 2015), where the IRS was accused of treating pro-Israel groups differently. And in Agency for Int’l Development v. Alliance for Open Society Int’l, 113 S.Ct. 2321, 2328 (2013), the Court limited the subsidy argument to specific activities being paid for by government funds, and blocked the argument for penalties against the entire organization. After all, political speech by exempt organizations is not subsidized, since it is taxed at the highest corporate rates under IRC section 527, meaning that 501(c)(4)s are the worst examples of penalties against the entire organization for non-subsidized speech. Moreover, with the relentless publicity about (and decisions against) the IRS targeting scandal, the IRS’s claim of being a neutral broker of tax rules has taken a beating.

Even Paul Streckfus, editor of EO Tax Journal and famously supportive of aggressive IRS enforcement of rules against political intervention, wrote in today’s [December 5, 2016] EOTJ: Freedom Path “may be right.” I would not want to be the IRS’s defense counsel in the next four years.