CRS STUDY EXPLAINS TACTICS FOR EXEMPT ORGANIZATIONS TO MAXIMIZE FREEDOM FROM LOBBYING RESTRICTIONS.

                       CRS REPORT FOR CONGRESS

This report provides an examination of the limits of current law and tactics for avoiding statutory restrictions on tax-exempt organizations.

TACTICS FOR MAXIMIZING TAX-EXEMPT ORGANIZATIONS' FREEDOM FROM RESTRICTIONS ON LOBBYING AND CAMPAIGN INTERVENTION

This discussion examines steps which might be taken to avoid the adverse tax consequences specified under various rules in the Internal Revenue Code and federal tax regulations that restrict lobbying by tax-exempt organizations and participation by such organizations in the campaigns of candidates for public offices. Two alternative courses of action are described: one suitable for cautious groups and the other for groups aggressively seeking to test the outermost frontiers separating officially tolerable from proscribed activities.

One initial observation which seems worthy of some emphasis is that useful lessons can be drawn from other, closely parallel legal contexts. Corporations and labor unions have for many years been subject to a prohibition (now part of the Federal Election Campaign Act) which makes it a felony to give or to spend treasury funds or dues money in connection with federal election campaigns. A substantial body of case law and practical experience for coping with this ban has accumulated over the years. In a similar vein but to a lesser degree, a useful body of case law and practical experience has also been developed in relation to various statutory restrictions on the use of government-supplied funds to pay for abortions. Both of these sources can be (and, indeed, have been) tapped for guidance in coping with the restrictions under examination.

I. A COURSE OF ACTION FOR CAUTIONS GROUPS

A clear implication of both the majority and the concurring opinions in Reagan v. Taxation With Representation, 461 U.S. 540, 551 (1983), is that groups of individuals who wish to enjoy tax-exempt status and certain other special tax benefits in carrying out activities of congressionally recognized benefit to society but who also wish to engage in lobbying or in advocating the election or defeat of candidates for public office should establish affiliated but distinct organizations with which to implement their disparate objectives.

In order to qualify not only for tax-exempt status but also as a recipient of tax-deductible "charitable" contributions, a section 501(c)(3) organization is indispensable (unless the group happens to be composed of veterans of military service who can organize as a group exempt under section 501(c)(19) and still qualify to receive deductible contributions by virtue of section 170(c)(3); the lobbying and campaign-intervention activities of 501(c)(19) organizations are not explicitly restricted by statute). A cautious group should be sure, at the time of applying for recognition of section 501(c)(3) status, to elect not to be treated as a private foundation. Thus, the special excise taxes on "taxable expenditures" and the so-called "responsibility rules" applicable to foundations can be avoided without foregoing significant benefits.

Even though section 501(c)(3) organizations are permitted to engage in a significant amount of lobbying (in some cases, as much as 25% of the resources of an organization can be devoted to such activity; see section 4911 of the Code), it is nevertheless probably worthwhile to establish a 501(c)(4) "social welfare" organization to serve as a backup vehicle for any lobbying in excess of that permitted by the 501(c)(3) organization. In this connection, it might be pointed out that the Supreme Court's majority opinion in the Taxation With Representation case, written by then-Associate Justice Rehnquist, clearly reflected a mistaken belief that 501(c)(3) organizations were entirely forbidden from engaging in any lobbying at all. Crucial to the Court's distinction of Speiser v. Randall, 357 U.S. 513 (1958), ¹ and its progeny was the following analysis:

* * * TWR is . . . 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. [Op. cit., at page 545.]

The assertion that "Congress has refused to pay for . . . lobbying out of public moneys" was incorrect. That is not the law. So long as "insubstantial" (which, under sections 501(h) and 4911, can mean up to 25% of an organization's budget), a section 501(c)(3) organization's lobbying DOES qualify to be subsidized via the charitable contribution deduction, as well as tax-exempt status.

Neither a 501(c)(3) organization nor a 501(c)(4) is a suitable vehicle for engaging in candidate advocacy. A section 527 "political organization" is probably best suited to such a purpose. Such an organization is tax-exempt but, as in the case of a section 501(c)(4) organization, donors are not allowed deductions for their contributions to it.

A cautious group would not transfer donations collected by its 501(c)(3) organization to its 501(c)(4) and 527 affiliates. See the majority opinion in Taxation With Representation, op. cit., at pages 544-545, where Justice Rehnquist asserted that "TWR would, of course, have to ensure that the sec. 501(c)(3) organization did not subsidize the sec. 501(c)(4) organization." Intuitively, it seems likely that soliciting nondeductible contributions to the 501(c)(4) and 527 affiliates would be comparatively more difficult than soliciting deductible contributions to the 501(c)(3) organization. However, no evidence of what an economist might describe as the deductibility elasticity of contributions has been discovered.

The regulations and statutory rules distinguish among various types of expression in terms of how much of each is allowed. In practice, however, some of the distinctions can, in appropriate factual settings, be elusive. For example, a so-called "editorial" advertisement commenting on a matter of public interest (e.g., the supposed advantages of the metric system of measurement) could conceivably become "grass roots lobbying" if a bill to require adoption of the metric system was pending before some legislative body in the locale where the advertisement appeared. In similar fashion, an otherwise unrestricted advertisement could conceivably amount to campaign intervention if it was presented during the campaign of a candidate who had chosen to make the subject of the advertisement an issue in the campaign. In fact, even before any official announcement of candidacy, an individual recognized by the media as a likely (or, perhaps, even only a potential) candidate could likewise take up the issue and thereby render a pertinent advertisement subject to restriction. A genuinely cautious group should consider such possibilities carefully in budgeting its expenditures and, at least in the case of its lobbying budget for its 501(c)(3) affiliate, it may wish to allow some margin of safety to accommodate what might be described as "unintentional" lobbying.

II. A COURSE OF ACTION FOR AGGRESSIVE GROUPS

Like a cautious group, a group of individuals committed to an aggressive effort of probing the outermost limits of legally tolerable lobbying and candidate advocacy should establish affiliated yet distinct organizations. A single organization seeking all pertinent tax benefits but also wishing to engage in substantial lobbying and more than de minimus candidate advocacy was the very type of entity rejected in the Taxation With Representation case. Thus, the prospects for an outright challenge to the body of relevant regulations and statutory rules based on First and Fifth Amendment guarantees seem dim. That is not to say, however, that an aggressive group could not use constitutional arguments to justify activities which a cautious group would avoid.

The majority opinion in Taxation With Representation applied the line of reasoning enunciated in Cammarano v. United States, 358 U.S. 498 (1959), a tax case in which the Court had held that there is no constitutional right to a business-expense deduction for lobbying expenses incurred by a for-profit enterprise. The essential rationale was that the mere existence of a constitutionally protected freedom does not generate an entitlement to governmental subsidies with which to exercise that freedom. In addition to the majority opinion in Taxation With Representation, there was also a concurring opinion by Justice Blackmun, in which Justices Brennan and Marshall joined. The concurring members of the Court agreed that Cammarano and its progeny, rather than Speiser and its progeny, applied in the circumstances of the case before the Court. Their reasoning could be highly significant for present purposes.

Justice Blackmun argued, as follows:

If viewed in isolation, the lobbying restriction contained in sec. 501(c)(3) violates the principle, reaffirmed today, ante, at 545, "that the government may not deny a benefit to a person because he exercises a constitutional right." ² Section 501(c)(3) . . . deprives an otherwise eligible organization of its tax-exempt status and its eligibility to receive tax- deductible contributions for all its activities, whenever one of those activities is "substantial lobbying." Because lobbying is protected by the First Amendment, Eastern Railroad Presidents Conf. v. Noerr Motor Freight, Inc., 365 U.S. 127, 137-138 (1961), sec. 501(c)(3) therefore denies a significant benefit to organizations choosing to exercise their constitutional rights. ³

The constitutional defect that would inhere in sec. 501(c)(3) alone is avoided by sec. 501(c)(4). As the Court notes, ante, at 544, TWR may use its present sec. 501(c)(3) organization for its nonlobbying activities and may create a sec. 501(c)(4) affiliate to pursue its charitable goals through lobbying. [See Taxation With Representation, op. cit., at page 552.]

A vitally important difference between the concurring members and the majority of the Court appears at this point in the concurring opinion.

The majority of the Court, perhaps as a result of the mistaken view pointed out earlier concerning what the restriction on lobbying by section 501(c)(3) organizations actually specified, took the position, noted earlier in this discussion, that a relevant section 501(c)(3) organization would "have to ensure that [it] did not subsidize the sec. 501(c)(4) organization" with which it was affiliated (op. cit., at page 544). By contrast, the concurring opinion argued that:

A sec. 501(c)(3) organization's right to speak is not infringed, because it is free to make known its views on legislation through its sec. 501(c)(4) affiliate without losing tax benefits for its nonlobbying activities.

Any significant restriction on this channel of communication, however, would negate the saving effect of sec. 501(c)(4). It must be remembered that sec. 501(c)(3) organizations retain their constitutional right to speak and to petition the Government. Should the IRS attempt to limit the control these organizations exercise over the lobbying of their sec. 501(c)(4) affiliates, the First Amendment problems would be insurmountable. It hardly answers one person's objection to a restriction on his speech that another person, outside his control, may speak for him. Similarly, an attempt to prevent sec. 501(c)(4) organizations from lobbying explicitly on behalf of their sec. 501(c)(3) affiliates would perpetuate sec. 501(c)(3) organizations' inability to make known their views on legislation without incurring the unconstitutional penalty. Such restrictions would extend far beyond Congress' mere refusal to subsidize lobbying. See ante, at 544-545, n.6. [Op. cit., at page 553.]

It is possible to infer from this argument that the Constitution may protect transfers of money from 501(c)(3) organizations to 501(c)(4) affiliates for use in lobbying so long as none of the funds so transferred had derived any benefit from the deduction for charitable contributions. For example, income earned by the 501(c)(3) organization from an unrelated business might be so transferrable.

An argument that a right to make such transfers is constitutionally protected could cite Planned Parenthood v. Arizona, 789 F.2d 1348 (9th Cir., 1986), sum. aff'd., 55 U.S.L.W. 3315 (1986). This case struck down a provision of Arizona law that prohibited any "use of state funds by organizations that offer abortion-related services, even if the state funds themselves are not used for abortion-related services" (id., at page 1350). The Court of Appeals' rationale was that the State had failed to sustain its "burden . . . to show that ear-marking of state funds for non-abortion-related activities and a system of tracing reasonably susceptible to auditing by state officials was not possible to create" (id., at page 1351).

A genuinely aggressive group might even argue that, on the basis of Taxation With Representation, Planned Parenthood, Spieser, and Perry, expenditures made by a 501(c)(3) or 501(c)(4) organization for campaign intervention are constitutionally protected so long as made with funds which had derived no benefit from the organization's exempt status (e.g., after-tax unrelated business income).

In addition to fashioning constitutional defenses for actions undeniably in violation of the plain meaning of the relevant regulations and statutory restrictions, there is another tactic which might be employed by an aggressive group. It was noted earlier in this discussion that the restrictions treat different types of expression and association differently and that circumstances can determine the character of a particular expression as a wholly unrestricted editorial advertisement, restricted "lobbying," or even, in the case of a section 501(c)(3) organization, flatly banned "campaign intervention." Without doubt, restrictions on expression that are not content neutral and restrictions which have the effect of holding First Amendment freedoms of expression and association hostage to the chance acts of legislators or the whims and expediencies of candidates and those whom the news media choose to recognize as serious POTENTIAL candidates can legitimately arouse the constitutional sensibilities of some. But, wholly apart from their constitutional implications, these situations also afford OPPORTUNITIES for groups interested in extending the frontiers of activity recognized as not in violation of the restrictions.

The greater the number of relevant restrictions and the greater the number of clarifications made by administrative and judicial rulings over the years, the more precise relevant line-drawing becomes. In turn, as the limits become more precise over time, it becomes easier for those subject to them to fashion expression (and other conduct) which comes ever closer to, but remains nevertheless distinct from, proscribed expression (or other conduct). Thus, a gradual process of erosion, of blurring lines of distinction, occurs. This type of process is reflected by early case law interpreting the statutory prohibition against candidate support by labor unions mentioned earlier in this report. For a time, federal courts, led by the Supreme Court's decision in United States v. Congress of Industrial Organizations, 335 U.S. 106 (1948), avoided ruling on the constitutionality of the prohibition by indulging in the fiction that publications which both the plain language of the statute and explicit legislative history suggested were covered by the ban were really "educational" communications to which the ban did not apply. Cf. United States v. Painters Local Union, 172 F.2d 854 (2d Cir., 1949) (August Hand).

An identical fiction (i.e., that certain communications made by the American Birth Control League were not "lobbying" but "educational" communications) was rejected by Learned Hand in what is generally regarded as the earliest case concerning lobbying activities by tax-exempt organizations (i.e., Slee v. Commissioner, 42 F.2d 184 (2d Cir., 1930)). However, other distinctions between "lobbying" or "campaign intervention" and a particular course of conduct engaged in by a pertinent tax-exempt organization might be drawn.

One final point which, for want of any more logical place to make it, seems appropriately noted at the end of this discussion is that, by analogizing to the case law involving corporate and union political contributions and expenditures, it can be argued that allowing the same individuals to control several affiliated organizations which are maintained as separate organizations in order to maximize constitutionally protected freedoms (and, incidentally, tax benefits) does not exalt form over substance. To support such an argument, the Supreme Court's decision in Pipefitters v. United States, 407 U.S.385 (1972), might be cited. That is the decision which sanctioned the maintenance and use of so-called "separate segregated funds" (more commonly referred to colloquially as "political action committees" or PAC's) to conduct political activities on behalf of individuals who are closely associated with corporations and unions.

                                   Robert B. Burdette

² This quotation from the majority opinion in Taxation with Representation is a succinct description of the holding in Perry v. Sindermann, 408 U.S. 593, 597 (1972), which is a decision in the Speiser line implementing the so called "principle of unconstitutional conditions."

³ At this point, the concurring opinion includes the following footnote:

See Speiser v. Randall, 357 U.S. 513, 518-519 (1958); Cammarano v. United States, 358 U.S. 498, 515 (1959)(Douglas, J., concurring) (denial of business-expense deduction for lobbying is constitutional, but an attempt to deny all deductions for business expenses to a taxpayer who lobbies would penalize unconstitutionally the exercise of First Amendment rights); cf. Harris v. McRae, 448 U.S. 291, 317, n.19 (1980) (denial of welfare benefits for abortion is constitutional, but an attempt to withhold all welfare benefits from one who exercises right to an abortion probably would be impermissible); Maher v. Roe, 432 U.S. 464, 474-475, n.8 (1977) (same).