CRS EXAMINES BILL ON POLITICAL ACTIVITIES OF CHARITIES.

                       CRS REPORT FOR CONGRESS

This report analyzes H.R. 2942, 100th Congress, 1st Session (1987). Various new obligations and restrictions imposed on the political activities of tax-exempt organizations are described. Constitutional considerations implicated by some of the proposed new restrictions are also explained.

AN ANALYSIS OF H.R. 2942, 100TH CONGRESS, 1ST SESSION (1987), A BILL TO INCREASE DISCLOSURE OF INFORMATION BY TAX-EXEMPT ORGANIZATIONS AND TO IMPOSE FURTHER RESTRICTIONS ON THEIR POLITICAL ACTIVITIES

This report analyzes H.R. 2942, 100th Congress, 1st Session (1987). The discussion neither endorses nor opposes the bill. Rather, it describes the various new obligations and restrictions that would be imposed on pertinent organizations and highlights language that would either clarify or exacerbate the ambiguities of existing relevant law. The proposals are examined in the order in which they appear in the bill. Conforming and technical amendments and provisions specifying effective dates are not discussed.

The first provision of the bill simply provides that, if enacted, it would be known as the "Tax-Exempt Organizations' Lobbying and Political Activities Accountability Act of 1987."

The first substantive provision of the bill, section 10l(a), would insert into the Internal Revenue Code a new section 6113, relating to "disclosure of nondeductibility of contributions." Subsection (A) of this new section would obligate certain organizations to include in every "fundraising solicitation" they made an express statement, in a "conspicuous and easily recognizable format," that donations made to them do NOT qualify as deductible charitable contributions. The organizations which would be subject to this new obligation are described in subsection (b)(1) of the proposed new section. Only certain organizations which are NOT described in IRC section 170(c) are covered. [Note: Section 170(c) of the Internal Revenue Code defines the term "charitable contribution" and in the course of doing so describes several different types of organizations which can qualify as recipients of such contributions.] Among the large number of organizations not described in IRC section 170(c), any particular one would be subject to the new obligation only if one of the following three conditions were satisfied: (1) it was exempt from tax under IRC section 501(a) and was described under IRC section 501(c), other than under section 501(c)(1); or (2) it was a "political organization" within the meaning of IRS section 527(e); or (3) it was formerly either a "political organization" or a section 501(c)-organization (other than a section 501(c)(1)-organization) at any time during the five years preceding the date of the solicitation or was a successor to an organization so described during such five- year period. Subsection (b)(2) of the proposed new section 6113 specifies an exception to the applicability of the proposed new disclosure obligation. Subparagraph (A) provides that the obligation is inapplicable to an organization with gross receipts not exceeding $100,000. Subparagraph (B) then indicates that the Secretary may treat multiple organizations as a single organization if necessary to prevent circumvention of the $100,000 limit set out in subparagraph (A). Since the cost of including the notice in solicitations is presumably negligible and since NO organization which is not described in IRC section 170(c), regardless of its size or its character as a pertinent current or former section 501(c)- organization or "political organization" qualifies to receive deductible charitable contributions, it is unclear why any exception for "small" organizations need be allowed or, indeed, why the disclosure obligation would be limited to organizations described in subparagraphs (A), (B), and (C) of the proposed new section 6113 (b)(1). Conceivably, the exception is a concession to administrative convenience.

Subsection (b)(3) of the proposed new section 6113 provides a special rule to the effect that, in the case of an organization described in IRC section 170(c)(4), i.e., "a domestic fraternal society, order, or association, operating under the lodge system," the organization would be treated as described in section 170(c) ONLY with respect to solicitations for donations which were to be used EXCLUSIVELY for purposes of the types specified in section 170(c)(4), i.e., for "religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals."

A statutory definition for the term "fundraising solicitation" would be supplied by a new section 6113(c). It would provide that, for purposes of the section, the term would mean generally any solicitation of contributions or gifts made in written or printed form, by television or radio, or by telephone (see proposed section 6113(c)(1)). However, the term would NOT mean any letter or telephone call that was not part of a coordinated fundraising campaign soliciting more than ten persons during the calendar year (see proposed section 6113(c)(2)). Once again, no rationale for the exception is immediately obvious although, also again, the exception may reflect a concession to administrative convenience. No formal definition is supplied for the expression "coordinated fundraising campaign."

Section 101(b) of the bill would add a new section 6710 to the Internal Revenue Code. This new provision would specify penalties for various types of failures to comply with the new obligation to disclose the nondeductibility of contributions made to relevant organizations. The basic penalty would be a fine of $1,000 per day for each day on which a failure to comply "occurred" (see the first sentence of proposed section 6710(a)). However, the maximum penalty under subsection (a) for failures by any particular organization in any particular calendar year would be limited to $10,000 (see the second sentence of proposed section 6710(a)). The use of a plural noun in this context (i.e., failures) implies that, given the requisite combination of number and duration, failures to comply could become penalty-free. For example, assume that prepared copy for a solicitation which omitted the necessary disclosure was simultaneously delivered on the Friday before a three-day weekend to a newspaper, a television station, and a radio station for continuous distribution during a specified period. Assume further that the offending copy could not be withdrawn until the business offices of the newspaper, the television station, and the radio station re- opened on the Tuesday following the three-day weekend (i.e., on the fourth day of noncompliance). Thus, three failures to comply, each four days' duration, would have occurred and, but for the maximum limitation, cumulative fines for the failures would amount to $12,000. Because of the maximum limitation, only $10,000 in fines would be imposed. Apparently, any additional unintentional failures to comply occurring subsequently during the same calendar year would be entirely immune from penalty. It is not clear how, if at all, unavoidable failures to comply (e.g., failures to comply which persist on days such as holidays when it is impossible to achieve compliance) are intended to be affected by a provision set out under proposed new section 6710(b) to the effect that no penalty would be imposed if a failure to comply is shown to be "due to reasonable cause."

Subsection (c) of the proposed new section would apply in the case of any failure to comply that reflected "intentional disregard of the requirement of section 6113." In such cases, three modifications of the normal penalty rules would apply. First, "the penalty under subsection (a) for the day on which such failure occurred" would be the greater of $1,000 or "50 percent of the aggregate cost of the solicitations which occurred on such day and with respect to which there was such a failure" (see section 6710(c)(1)). Since the introductory clause of this modification refers to "the," rather than "a" or "any," day on which a relevant failure occurred, the intended reference may be to the day on which such failure FIRST occurred. Interpreting this modification to apply to EVERY day on which a relevant failure persisted would not be incompatible with the language used but nevertheless seems likely not to be intended in light of the thrust of the remaining two modifications.

The second modification of the penalty rules that would apply in cases involving INTENTIONAL DISREGARD of section 6113 is that "any penalty under subsection (a) for the day on which such failure occurred" would not be subject to "the $10,000 limitation of subsection (a)" (see section 6710(c)(2)). The language used here seems awkward and somewhat ambiguous. Once again, reference to "the," rather than "a" or "any," day on which a pertinent failure occurred may be intended to refer to the day on which a pertinent failure FIRST occurred. If that is indeed the intent of the language used, then the effect of the second modification would be that, whenever a pertinent failure involved aggregate solicitation costs in excess of $20,000, a penalty equal to one-half of those costs would be imposed without regard to the otherwise applicable $10,000 limitation. An alternative, though likely unintended, interpretation of this modification is that, in the case of relevant intentional-disregard failures, whenever solicitation costs exceeded $2,000, the resulting penalty, equal in amount to one-half of the solicitation costs, would be imposed EVERY day the failure remained uncorrected without regard to ANY ceiling on either the amount per day or the number of days over which the penalty would accumulate.

The third modification of the normal penalties provides that whatever penalty may have been imposed under the terms of the second modification discussed above would be entirely disregarded in applying the $10,000 limitation specified under the second sentence of section 6710(a) to "other penalties under subsection (a)" (see section 6710(c)(3)). It is unclear whether the reference here to "other penalties" is intended to refer to penalties with respect to OTHER SOLICITATIONS, other penalties with respect to continuous re- publication or re-broadcast of the SAME solicitation, or both.

Subsection (d) of the proposed new section 6710 would supply rules for identifying days on which failures "occur." A solicitation by television or radio would be "treated as occurring when the solicitation was telecast or broadcast" (see proposed section 6710(d)(1)). Whether prepaid continuous retelecasts or rebroadcasts over a period of days would be treated separately or in the aggregate is not specified. A solicitation by mail would be "treated as occurring when the solicitation was mailed" (see proposed section 6710(d)(2)). How a batch of identical solicitations mailed over the course of several days would be treated (i.e., individually or in the aggregate), is not specified. A solicitation made in written or printed form but not by mail would be "treated as occurring when the solicitation was distributed" (see proposed section 6710(d)(3)). The meaning of this rule seems plain enough in the case of flyers or leaflets. However, in the case of solicitations that appear in newspapers and magazines, it is not clear whether they are "distributed" when their sponsors transfer them into the hands of the newspapers (or magazines) or instead when the newspapers (or magazines) transfer them into the hands of readers. If the latter is what is intended, there is the added ambiguity of whether, in the case of a weekly (or monthly or quarterly) publication, distribution would be treated as occurring continuously over the course of the week (or month, calendar quarter, or other period). In the case of posters and billboards, it seems likely that "distribution" might be thought to occur continuously as long as the solicitation remained exposed to view. Finally, a solicitation by telephone would be "treated as occurring when the solicitation was made" (see proposed section 6710(d)(4)). Whether a group of telephone calls following an identical solicitation format and made over the course of several days as part of a single, coordinated effort would be treated individually or in the aggregate is not specified.

Section 102(a) of the bill would add a new subsection (e) at the end of IRC section 6104. Existing section 6104 requires certain tax- exempt organizations and trusts to make certain types of information available to the public. The new subsection (e) would be divided into two paragraphs. New paragraph (1) would require a covered organization to make the annual returns it filed pursuant to IRC section 6033 available for public inspection for three years (see proposed section 6104(e)(1)(A)). However, disclosure of contributors' names and addresses would NOT be required (see proposed section 6104 (e)(1)(C)). The organizations which would be subject to this obligation to make annual return data publicly accessible are tax- exempt organizations described under either section 501(d) or section 501(c), other than those section 501(c)(3)-organizations which are private foundations within the meaning of section 509(a). The second paragraph of the new subsection (e) would require certain organizations to make their applications for exemption (and supporting documents) available for public inspection PERMANENTLY (see proposed section 6104(e)(2)(A)). This requirement would apply to ALL organizations described under section 501(c) or section 501(d) which applied for exemption under section 501(a). No exception from this requirement is specified for private foundations.

Section 103(a) of the bill would add two new paragraphs, (9) and (10), at the end of existing IRC section 6033(b). Section 6033 relates to returns which must be filed by exempt organizations and subsection (b) thereof specifies certain categories of information which must be disclosed annually by those tax-exempt organizations described under section 501(c)(3) OTHER THAN churches and church- related organizations and section 501(c)(3)-organizations (other than private foundations) the annual gross receipts of which normally do not exceed $5,000. Both of the two new paragraphs would confer broad additional regulatory authority on the Secretary. The proposed new paragraph (9) would authorize the Secretary to require disclosure of such information concerning certain inter-organization transfers, transactions, and relationships as may be needed to prevent "diversion of funds from the [disclosing] organization's exempt purpose" or "misallocation of revenue or expenses." The proposed new paragraph (10) would authorize the Secretary to require disclosure of such other information as needed "for purposes of carrying out the internal revenue laws."

Section 104 of the proposal would make some relatively minor changes with respect to penalties for failures to comply with the amended (or new) disclosure requirements.

Title II of the proposal relates to "political activities."

Section 201 of the bill would "clarify" several existing provisions of law that directly or indirectly prohibit certain types of tax-exempt organizations from engaging in campaign activities "on behalf of any candidate." The "clarification" would actually expand the scope of the ban so as to prohibit not only pertinent activities undertaken "on behalf of" a candidate but also those undertaken "in opposition to" a candidate. The existing provisions which would be modified in this fashion are IRC sections 170(c)(2)(D); 501(c)(3); 504(a)(2); 2035(a)(2) and (3); 2106(a)(2)(A)(ii) and (iii); 2522(a)(2); and 2522(b)(2) and (3).

Section 202 of the bill would impose excise taxes on "political expenditures" by section 501(c)(3)-organizations. These taxes would apply to both the organizations themselves and to their managers. In the case of the organizations, an "initial" tax equal to 10 percent of the amount of each "political expenditure" would be imposed (see proposed section 4955(a)(1)). If any pertinent expenditure was not "corrected" within a specified period, then an additional tax equal to 100 percent of the amount of the expenditure would be imposed (see proposed section 4955(b)(1)). In the case of managers, an initial tax equal to 2-1/2 percent of the amount of a pertinent expenditure would be imposed IF the manager approved the expenditure "knowing that it [was] a political expenditure," UNLESS the approval "[was] not willful and [was] due to reasonable cause" (see proposed section 4955(a)(2)). If any manager refused to agree to part or all of the requisite correction, an additional tax equal to 50 percent of the amount of the expenditure would be imposed on that manager (see proposed section 4955(b)(2)). If more than one management official of a particular organization was liable for initial or additional tax under these rules, they would be jointly and severally liable (see proposed section 4955(c)(1)). Furthermore, the maximum amount of initial tax for which any manager could be made liable would be $5,000 per expenditure and the maximum amount of additional tax would be $10,000 per expenditure (see proposed section 4955(c)(2)). Special statutory definitions would be supplied in order to explain what is intended to be meant by "political expenditure" and what would be required to effect a "correction" of such an expenditure.

Solely for purposes of the proposed new excise taxes, the term "political expenditure" would be defined by a new section 4955(d)(1) to mean, in general, "any amount paid or incurred by a section 501(c)(3) organization in connection with any participation in, or intervention in (including the publication or distribution of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." This language is a nearly identical recitation of that presently used under section 501(c)(3) to restrict qualification for exempt status. The only real difference is the use of the phrase "in connection with" in the proposed new definition but not in the section 501(c)(3) restriction. Conceivably, this difference might give rise to speculation as to whether the proposed new definition's injunction against expenditures paid or incurred "in connection with" participation or intervention in a pertinent campaign might be intended to have a broader scope than the injunction in section 501(c)(3) against expenditures paid or incurred TO participate or TO intervene in such a campaign. If the relevant intent is to mirror the parameters of section 501(c)(3) exactly, some modification of the definition may be needed.

Proposed section 4955(d)(2) would go on to lend some specificity to the definition set out under section 4955(d)(1) by identifying certain types of expenditures which explicitly would be included as "political expenditures" in the case of any "organization formed, or availed of, substantially for purposes of promoting the candidacy (or potential candidacy) of an individual for public office." By declaring the various types of expenditures identified as "political expenditures" IN THE CASE OF organizations of the kind described, this rule clearly, though perhaps not intentionally, implies that expenditures of the types identified paid or incurred by OTHER pertinent organizations would NOT be considered "political expenditures." That is, such an organization could, for example, pay unlimited sums to a candidate for speeches or "other services" with complete impunity (at least, insofar as the new excise taxes would be concerned). Apart from the question of whether such an interpretation of the introductory clause of the proposed new section 4955(d)(2) is intended, some other ambiguities remain.

The introductory language of the provision could be interpreted to imply that ANY organization appropriately formed, or availed of, would be subject to the rule announced in the remainder of the provision. However, the preceding definition would apply only to section 501(c)(3) organizations and the instant provision seems (because of its placement in the codification) intended to supplement the preceding definition. Thus, it appears likely that the instant provision is intended to apply only to section 501(c)(3) organizations appropriately formed or availed of. To the extent there might be doubt, however, some clarification as to which interpretation is in fact intended may be advisable.

The rule announced in the provision would apparently only apply in the case of an organization which was either formed or availed of "substantially" for specified purposes. Hence, presumably, an organization formed or availed of otherwise than substantially for such purposes would not be within the contemplated scope of the rule. The difficulty of enforcing an undefined "substantiality" standard was clear for many years in the case of the LOBBYING limitation imposed under section 501(c)(3). That difficulty was only partially relieved when less-than-universally applicable objective tests were eventually enacted (see sections 501(h) and 4911, enacted in 1976).

The rule also would apparently only apply to an organization formed, or availed of, for purposes of "promoting" a pertinent candidacy. Thus, organizations engaged in so-called "negative campaigning" (i.e., organizations devoted exclusively to OPPOSING a candidate) would apparently not be subject to the rule. Indeed, organizations formed, or availed of, to "test the waters" (i.e., to ascertain, through surveys, polling, test advertising, and so on, whether some particular individual had any hope of being a successful candidate) would arguably not be engaged in "promoting" any candidate.

The rule would apply to organizations formed or availed of to promote, inter alia, an individual's "potential" candidacy. No statutory definition of "potential candidacy" is supplied in the proposal. Presumably, the term is intended to incorporate expenditures incurred to determine the viability of a particular individual's candidacy (i.e., to "test the waters"). However, since pertinent testing is essentially NOT an equivalent of "promoting" (i.e., advocating) the election of an individual to a public office, some restatement more clearly expressing relevant intent may be needed.

Three of the subparagraphs identifying specific relevant expenditures include ambiguities. The one set out at proposed new section 4955(d)(2)(C) describes "[e]xpenses of conducting polls, surveys, or other studies, or preparing papers or other materials, for use by such individual" but does not limit its scope to expenses incurred to purchase relevant studies or papers for use by a pertinent individual in his or her capacity as a candidate or potential candidate. In other words, it seemingly would characterize expenses incurred by a pertinent organization for conducting otherwise relevant studies for someone in his or her PERSONAL capacity as "political expenditures." Another, set out at section 4955(d)(2)(D), refers to, inter alia, expenses of fundraising for a relevant individual. Again, the language used does not explicitly limit applicability of this rule to fundraising for the individual in his or her capacity as a candidate or potential candidate. Thus, it could conceivably be interpreted as including, for example, fundraising expenses incurred to amass a legal defense fund for the individual concerned.

Finally, the subparagraph set out at section 4955(d)(2)(E) describes "[a]ny other expense which has the primary effect of promoting public recognition, or otherwise primarily accruing to the benefit, of such individual." Initially, it might be pointed out that this subparagraph focuses on the effects of activities rather than on the activities themselves and, in this regard, is distinct from all of the other subparagraphs. This distinction is not without significance. In determining the character of expenditures incurred to undertake some activity, all of the other subparagraphs focus on the nature of the activity financed while this subparagraph alone focuses on the effects of an activity. Effects of activities are not always even predictable, let alone intended. Nevertheless, the proposal does not incorporate a scienter requirement. In other words, an expenditure would apparently be deemed a "political expenditure" if, inter alia, its primary effect turned out to have been the promotion of public recognition for a relevant individual, regardless of whether such an effect had been intended by the spender or, indeed, even foreseen. In this regard, the language of the provision seems overinclusive. By contrast, since the provision concentrates exclusively on PRIMARY effects, an activity deliberately undertaken intending it to have the secondary, or even incidental, effect of promoting a relevant individual's candidacy evidently would not be deemed to involve a "political expenditure." Finally, the provision also ignores so-called "negative campaigning." That is, only expenditures which promoted public recognition of a relevant individual or which otherwise accrued to the benefit of that individual would be subject to the provision. Expenditures which had the effect of stimulating opposition to a relevant individual's candidacy or which otherwise accrued to the discredit of such an individual would not be covered.

Parenthetically, it seems appropriate to note a recent decision by the Tax Court concerning the prohibition against campaign participation or intervention that is set out under section 501(c)(3). In Association of the Bar of the City of New York v. Commissioner, 89 T.C. No. 42, September 17, 1987, the Tax Court overruled the Commissioner and determined that the petitioner's practice of rating candidates for elective judicial offices did not constitute participation or intervention in any political campaign on behalf of any candidate for public office within the meaning of section 501(c)(3). Presumably, if rating such candidates is not contemplated by existing law, it likewise would not be contemplated by section 501(c)(3) as it would be amended by the proposal (i.e., if a favorable rating is not participation or intervention "on behalf of" a pertinent candidate, then an unfavorable rating ought not to be deemed participation or intervention "in opposition to" one). Since the new section 4955(d)(1) would employ nearly identical language to that used in section 501(c)(3), similar standards would presumably apply and, thus, any expenditures incurred in rating candidates ought not be deemed "political expenditures" under the general definition of section 4955(d)(1). However, it seems indisputable that expenditures incurred in rating candidates would necessarily be expenses having "the primary effect of promoting public recognition" of the candidates rated within the meaning of section 4955(d)(2). Consequently, the same activity would or would not involve "political expenditures" depending solely on the identity and character of the spender. That identical conduct would be treated so very differently simply because of the identity and character of those engaged in it does not necessarily raise any constitutional issues. For example, if the distinguishing characteristic between the two classes of entities identifies some rational basis on which the difference in tax treatment rests, then the provision resulting in the difference in treatment would not be invalid under the "equal protection" standards implicit in the Fifth Amendment's "due process" guarantee. The requisite rational basis would, of course, have to be demonstrable. That should prove easy enough when comparing, on the one hand, ordinary section 501(c)(3) organizations and, on the other, organizations that are, in fact and indisputably, "formed, or availed of, substantially for purposes of promoting the candidacy (or potential candidacy) of an individual for public office."

A far more serious constitutional issue is posed when there is no doubt at all that the excise taxes apply. Conditioning qualification for exempt status on forbearance from campaign participation or intervention (as existing law does) can survive scrutiny under the First Amendment despite the fact that political expression implicates so-called "core" or "fundamental" freedoms protected thereby. The rationale for upholding such conditioning of the benefits of tax exemption derives from a line of cases tracing back to Cammarano v. United States, 358 U.S. 498 (1959), and progressing through Regan v. Taxation With Representation, 461 U.S. 540 (1983). In the Cammarano case, a corporation was denied an income-tax deduction for expenses it had incurred to defray the costs of so-called "grass-roots" lobbying (i.e., an advertising campaign to persuade members of the general public to contact legislators and express support for the advertiser's position on pending legislation) it had undertaken in connection with a bill that would, if enacted, have affected the corporation's business substantially. Writing for the Court, Justice Harlan reasoned, as follows:

Petitioners suggest that if the Regulations are construed to deny them deduction, a substantial constitutional issue under the First Amendment is presented. They rely upon Speiser v. Randall, 357 U.S. 513, where a California statute requiring the taking of a loyalty oath as a condition of property tax exemption was struck down on grounds of procedural due process. This contention . . . is without merit. Speiser has no relevance to the cases before us. 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, as everyone else engaging in similar activities is required to do under the provisions of the Internal Revenue Code. Nondiscriminatory denial of deduction from gross income to sums expended to promote or defeat legislation is plainly not "'aimed at the suppression of dangerous ideas.'" 357 U.S., at 519. Rather, it appears to us to express a determination by Congress that since purchased publicity can influence the fate of legislation which will affect, directly or indirectly, all in the community, everyone in the community should stand on the same footing as regards its purchase so far as the Treasury of the United States is concerned. [Op. cit., at pages 512-513.]

Thus the denial of deduction was upheld.

In the Taxation With Representation case, the majority opinion, by then-Justice Rehnquist, emphasized the distinction between a refusal to subsidize a constitutionally protected freedom and the imposition of a penalty on the exercise of a constitutionally protected freedom. The opinion, op. cit., at pages 545-546, states that:

TWR [i.e., Taxation With Representation] contends that Congress' decision not to subsidize its lobbying violates the First Amendment. It claims, relying on Speiser v. Randall, 357 U.S. 513 (1958), that the prohibition against substantial lobbying by section 501(c)(3) organizations imposes an "unconstitutional condition" on the receipt of tax-deductible contributions. In Speiser, California established a rule requiring anyone who sought to take advantage of a property tax exemption to sign a declaration stating that he did not advocate the forcible overthrow of the Government of the United States. This Court stated that "[t]o deny an exemption to claimants who engage in certain forms of speech is in effect to penalize them for such speech." Id., at 518.

TWR is certainly correct when it states that we have held that the government may not deny a benefit to a person because he exercises a constitutional right. See Perry v. Sindermann, 408 U.S. 593, 597 (1972). But TWR is just as certainly incorrect when it claims that this case fits the Speiser-Perry model. The Code does not deny TWR the right to receive deductible contributions to support its non-lobbying activity, nor does it deny TWR any independent benefit on account of its intention to lobby. Congress has merely refused to pay for the lobbying out of public moneys. This Court has never held that Congress must grant a benefit such as TWR claims here to a person who wishes to exercise a constitutional right.

This aspect of these cases is controlled by Cammarano v. United States, 358 U.S. 498 (1959), in which we upheld a Treasury Regulation that denied business expense deductions for lobbying activities. We held that Congress is not required by the First Amendment to subsidize lobbying. Id., at 513. In these cases, as in Cammarano, Congress has not infringed any First Amendment rights or regulated any First Amendment activity. Congress has simply chosen not to pay for TWR's lobbying. We again reject the "notion that First Amendment rights are somehow not fully realized unless they are subsidized by the State." Id., at 515. (Douglas, J., concurring). [Footnotes omitted.]

Thus, the lobbying restriction imposed under section 501(c)(3) was upheld. Presumably, the ban on campaign participation or intervention would be upheld using essentially the same rationale. Congressional refusal to subsidize candidate advocacy is not incompatible with the First Amendment's protection of political expression. By contrast, the proposed imposition of excise taxes on "political expenditures" might well be constitutionally suspect.

The excise taxes under examination here implicate a body of constitutional doctrine referred to, but distinguished, in the Cammarano and TWR decisions. This body of doctrine derives from a line of cases tracing back to Speiser v. Randall, 357 U.S. 513 (1958), and progressing through Perry v. Sindermann, 408 U.S. 593 (1972). Writing for the majority in Speiser, Justice Brennan argued that:

It cannot be gainsaid that a discriminatory denial of tax exemption for engaging in speech is a limitation on free speech.

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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. To deny an exemption to claimants who engage in certain forms of speech is in effect to penalize them for such speech. Its deterrent effect is the same as if the State were to fine them for this 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.

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It has been said that Congress may not by withdrawal of mailing privileges place limitations upon the freedom of speech which if directly attempted would be unconstitutional. See Hannegan v. Esquire, Inc., 327 U.S. 146, 156; cf. Milwaukee Publishing Co. v. Burleson, 255 U.S. 407, 430-431 (Brandeis, J. dissenting). This Court has similarly rejected the contention that speech was not abridged when the sole restraint on its exercise was withdrawal of the opportunity to invoke the facilities of the National Labor Relations Board, American Communications Assn. v. Douds, 339 U.S. 382, 402, or the opportunity for public employment, Wieman v. Updegraff, 344 U.S. 183. So here, the denial of a tax exemption for engaging in certain speech necessarily will have the effect of coercing claimants to refrain from the proscribed speech. The denial is "frankly aimed at the suppression of dangerous ideas." American Communications Assn. v. Douds, supra, at 402. [Op. cit., at 517- 518.]

The doctrinal proposition that penalties imposed on expression, even indirectly through deprivation of tax or other governmental benefits, are virtually per se unconstitutional was broadly reiterated in the Perry case. Justice Stewart, writing for the Court, asserted that:

For at least a quarter-century, this Court has made clear that even though a person has no "right" to a valuable governmental benefit and even though the government may deny him the benefit for any number of reasons, there are some reasons upon which the government may not rely. It may not deny a benefit to a person on a basis that infringes his constitutionally protected interests -- especially, his interest in freedom of speech. For if the government could deny a benefit to a person because of his constitutionally protected speech or associations, his exercise of those freedoms would in effect be penalized and inhibited. This would allow the government to "produce a result which [it] could not command directly." Speiser v. Randall, 357 U.S. 513, 526. Such interference with constitutional rights is impermissible.

We have applied this general principle to denials of tax exemptions, Speiser v. Randall, supra, unemployment benefits, Sherbert v. Verner, 347 U.S. 398, 404-405, and welfare payments, Shapiro v. Thompson, 394 U.S. 618, 627 n.6, Graham v. Richardson, 403 U.S. 365, 374. But, most often, we have applied the principle to denials of public employment. United Public Workers v. Mitchell, 330 U.S. 75, 100; Wieman v. Updegraff, 344 U.S. 183, 192; Shelton v. Tucker, 364 U.S. 479, 485-486; Torcaso v. Watkins, 367 U.S. 488, 495-496; Cafeteria Workers v. McElroy, 367 U.S. 886, 894; Cramp v. Board of Public Instruction, 368 U.S. 278, 288; Baggett v. Bullitt, 377 U.S. 360; Elfbrandt v. Russell, 384 U.S. 11, 17; Keyishian v. Board of Regents, 385 U.S. 589, 605-606; Whitehill v. Elkins, 389 U.S. 54; United States v. Robel, 389 U.S. 258; Pickering v. Board of Education, 391 U.S. 563, 568. We have applied the principle regardless of the employee's contractual or other claim to a job. Compare Pickering v. Board of Education, supra, with Shelton v. Tucker, supra. [Op. cit., at 597.]

In light of the well-established character of the doctrine, the ability of the excise taxes to survive First Amendment scrutiny may be uncertain.

Proposed section 4955(e) would specify how the excise taxes described under section 4955(a) and (b) would be coordinated with certain taxes imposed on private foundations under section 4945. The taxes imposed under section 4945(a) and (b) apply to so-called "taxable expenditures," defined by section 4945(d) to include, inter alia, "any amount paid or incurred by a private foundation . . . to influence the outcome of any specific public election, or to carry on, directly or indirectly, any voter registration drive." According to the proposed new rule, any expenditure actually taxed (not merely subject to tax) under the new section 4955 as a "political expenditure" would not be considered a "taxable expenditure" for purposes of the taxes imposed under section 4945. To the extent the definition of "political expenditure" would contemplate a wider range of expenditures than does the existing definition for the term "taxable expenditure," one effect of this provision would be to broaden the scope of section 507, under which an organization's status as a private foundation can be involuntarily terminated (with Draconian impact).

Proposed section 4955(f) would supply definitions for various "other" terms of art used in the proposal. One such definition of interest here describes what would be meant by the term "section 501(c)(3) organization." According to proposed section 4955(f)(1), the term would mean any organization "which (without regard to any political expenditure) WOULD BE described in section 501(c)(3) and exempt from taxation under section 501(a)" (emphasis added). Thus, the definition would include not only those organizations which WERE described in section 501(c)(3) and which WERE exempt from taxation under section 501(a) but also organizations that were disqualified from being so described and exempt by virtue of having made POLITICAL expenditures. Evidently, the definition would not include, however, organizations which would qualify as described in section 501(c)(3) and exempt from taxation under section 501(a) if they had not been disqualified by virtue of having made excessive LOBBYING expenditures.

It might be recalled that the "additional" excise taxes on political expenditures would apply if an offending organization had not "corrected" the expenditures within a specified period of time. A definition for the term "correction" would be set out at section 4955(f)(3). According to that definition, the term would mean, "with respect to any political expenditure, recovering part or all of the expenditure to the extent recovery is possible, establishment of safeguards to prevent future political expenditures, and where full recovery is not possible, such additional corrective action as is prescribed by the Secretary by regulations." Presumably, this definition would obligate the Treasury to identify what "additional corrective action" would have to be undertaken in every case where the amount of a political expenditure could not be recovered in full from the person to whom it was paid. The proposal supplies no guidance whatever as to what ADDITIONAL "corrective" action might entail.

Section 203(a) of the proposal would insert a new section 7409 into the Code. Under certain circumstances, this new section would authorize the commencement of a civil suit in the name of the United States to enjoin a section 501(c)(3) from continuing to make political expenditures and for such other relief as needed to assure the organization's assets would be preserved for charitable or other purposes specified in section 501(c)(3). Two conditions could have to be satisfied before the authority could be invoked. The IRS would have to have notified the organization concerned of its intention to seek an injunction if political expenditures did not immediately cease (see proposed section 7409(a)(2)(A)). Moreover, the Commissioner of Internal Revenue would be required to have PERSONALLY determined that the organization had "flagrantly" participated or intervened in a campaign AND that injunctive relief would be appropriate to prevent future political expenditures (see proposed section 7409(a)(2)(B)). No definition, or other guidance to the intended meaning, of "flagrant" campaign participation or intervention is supplied in the proposal.

Section 203(b) of the proposal would add a new section 6852 to the Code. This provision would authorize early termination of a section 501(c)(3) organization's taxable year under certain circumstances. The Secretary would be required to have determined that the organization concerned had made political expenditures and that those expenditures were a "flagrant" violation of the ban against them. If those two conditions were satisfied, then the Secretary would be obligated to make an immediate determination of any income tax payable for that, or the immediately preceding, taxable year (or both) and a further determination of any special excise taxes payable under the new section 4955 for political expenditures made in that, or the immediately preceding, taxable year (or both). Then, "[n]otwithstanding any other provision of the law," the taxes so determined would "become immediately due and payable." Notice and demand for immediate payment would follow.

Section 204(a) would add a new section 4912 to the Code. This new section would impose excise taxes on LOBBYING expenditures made by certain organizations. These taxes would apply in the case of organizations which had lost the ability to qualify as described under section 501(c)(3) by virtue of having made excessive lobbying expenditures during the taxable year (see proposed section 4912(c)(1)). Oddly, however, the new taxes would not apply in the case of any organization which had elected to be subject to the objective limitations on lobbying expenditures described under section 501(h) or in the case of any church, convention of churches, or church affiliates (see proposed section 4912(c)(2)). Thus, the new taxes would only apply to a non-church organization which, while subject to the older and more indefinite limitation under which lobbying may not constitute a "substantial" part of such an organization's activities, lost its status as a section 501(c)(3) organization because of excessive lobbying. One of the proposed new excise taxes would be imposed on the organization. The full amount of all lobbying expenditures made by the organization during the taxable year when it lost its section 501(c)(3) status would be taxed at a rate of 5% (see proposed section 4912(a)). The other proposed new excise tax would be imposed on any organization manager who agreed to the making of lobbying expenditures knowing that they could result in the organization's loss of section 501(c)(3) status, unless the manager's agreement was "not willful and [was] due to reasonable clause" (see proposed section 4912(b)). The amount of this excise tax would be 5% of the amount of relevant expenditures to the making of which the manager agreed. Essentially for the same reasons described earlier in this report in the case of the proposed new excise taxes on POLITICAL expenditures, there may be some uncertainty concerning whether the proposed new excise taxes on LOBBYING expenditures could survive First Amendment scrutiny. Finally, section 204(b) of the proposal would amend IRC section 7454(b) to include a rule that the burden of proof would be on the Secretary in any determination of whether an organization manager had "knowingly" agreed to making "disqualifying lobbying expenditures" within the meaning of the proposed new section 4912(b).

                                   Robert B. Burdette