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Nonprofit Political Speech in a Post-Citizens United and IRS Scandal Environment

The following paper was presented at the 2014 ARNOVA (Association for Research on Nonprofit Organizations and Voluntary Action) Conference in Denver, CO.

There is near universal agreement that freedom of speech is essential to the strength of American democratic society.  It is also almost universally agreed that speech specific to the country’s political life is at the core of its liberty as a nation and, therefore, deserving of special protections.  From these lofty points of agreement, however, various factions proceed to define “speech,” “freedom,” and “political” in ways that illustrate the tension between liberty and equality, freedom and equity in the practice of political dialogue.  There is a considerable body of recent legal precedent that describes the debate and seeks to find balance while accommodating changes in technology, political campaigning, and methods of assembling to achieve political expression and election influence.

The Citizens United case decided by the US Supreme Court in 2010 not only expanded the opportunity for nonprofit and for-profit corporate entities to participate in the political affairs of the country.  It also served as a catalyst for what has come to be known as “the IRS scandal.”  Within weeks of the Citizens United decision, Internal Revenue Service staff began identifying applications for tax exemption that included politically conservative-sounding keywords and delaying their processing.  When the handling of what the IRS referred to internally as “Tea Party cases” was disclosed by IRS Exempt Organizations (EO) Division Director Lois Lerner in May, 2013, shortly before the public release of an inspector general’s report, it started a partisan political controversy that continues, albeit with varying levels of public attention, to this day.

While both Citizens United and the IRS scandal affect many types of nonprofit corporations, particular attention has been directed at “social welfare” organizations, tax-exempt under section 501(c)(4) of the Internal Revenue Code.  In late 2013, the IRS developed proposed regulations governing permissible and impermissible political activities performed by 501(c)(4) groups.  According to IRS Commissioner John Koskinen, the more than 147,000 public comments received in response to the proposed regulations were double those received in all public comment opportunities offered by the Treasury Department for all proposed regulations in the preceding seven years.  Virtually all comments received were negative, prompting the IRS to announce a redrafting of proposed regulations, currently scheduled to be released sometime in late 2014 or during 2015.

Citizens United, along with the McCutcheon case which succeeded it, indicate an increased deference by the Court to political expression and a reluctance to sanction government regulation of political activity.  The practice by the IRS to screen applications for tax-exemption based on possible political activity, especially when based on political activity associated with only one portion of the political spectrum, represents a possible danger to political speech identified by the Court in the Citizens United decision.  The subsequent attempt by the IRS to promulgate regulations governing political activity by one subset of tax-exempt entity – 501(c)(4) organizations – was met with vociferous opposition.  The opposition was based on both the specifics of the proposed rules and by skepticism by some that the IRS could be trusted to be an impartial regulator, especially with the IRS scandal remaining unresolved.

The future regulation of nonprofit political activity is highly unlikely to satisfy those in favor of greater regulation.  The IRS scandal and the IRS’s abortive 2013 attempt to draft regulations governing 501(c)(4) political activity illustrate the Supreme Court Citizens United majority’s concerns about regulation of political speech proving opportunity for government to intervene in political discourse to its own perceived interest and advantage.  There are dangers and pitfalls in any choice, and the Court prefers the pitfalls of liberty and the marketplace of ideas to the pitfalls associated with restricting political speech and activity in the name of equity.

Citizens United v. Federal Election Commission

Many legal scholars and others have written eloquently and intelligently on the arguments contained in and effects of the Citizens United (syllabus: http://supreme.justia.com/cases/federal/us/558/08-205/index.pdf; decision: https://supreme.justia.com/cases/federal/us/558/08-205/opinion.html) decision.  In the context of this paper, I will limit myself to a brief synopsis of the decision and key arguments and noting that the decision acted as a triggering event to subsequent activity by the IRS to regulate political activity by nonprofit organizations as well as a guideline for the development of new regulations of political speech and activity by nonprofit organizations.

The Court held that it had previously erred and, therefore, overturned an earlier decision, Austin v. Michigan Chamber of Commerce, where it upheld a key section of the Bipartisan Campaign Reform Act of 2002 (BCRA) limiting political expenditures (and, thereby, political activity) by corporations and labor unions.  Contrary to BCRA’s provisions in §203 (which amended §441b of the Federal Election Campaign Act of 1971) and the Austin decision, Citizens United holds the position that political speech is central to democracy, and that laws seeking to regulate speech are subject to strict scrutiny by the Court.  To be upheld, legislation seeking to regulate speech based on the speaker’s identity must satisfy the strict scrutiny requirement. The Court found the facts of the case did not meet the strict scrutiny requirement, and that there was no workable alternative to overturning Austin.

There were several difficulties identified by the Court in applying the §441b restrictions, centered around ambiguities in technology, lack of regulatory clarity in identifying allowable (as opposed to disallowed) speech activities and entities, the lack of foundation for assuming, for legal purposes, that some political actors are more prone to corruption than others, and the presence of legal precedent that contradicts Austin.

Technology issues include: is a YouTube video “widely distributed” under the law?  If an organization posts material on its web site that qualifies legally at the time of its posting, does it become disallowed under law and regulation simply because it remains on the same web site within 60 days of an election?  The law, and the interpretation of law, lags behind technological innovation.  Lacking guidance, organizations and individuals find themselves uncertain as to whether certain speech is allowed or disallowed based on timing and format.  The potential risks (to the speakers) of political speech in these circumstances may lead to instances of self-limitation and self-censorship that the Court identifies as an unacceptable prior restraint on speech.

The issue of self-censorship as prior restraint is not limited to technology when the regulations governing political speech are both detailed and largely interpretive rather than declarative.  By the same token, the ambiguities inherent in regulating political speech invite some with access to legal and financial resources to flout the regulations and await protracted litigation long after the election cycle ends.  Neither self-censorship nor aggressive engagement with government regulators benefits the political process.

Addressing the potential for corruption of the political process by allowing political speech by corporations and labor unions, the Court asserts that the potential for corruption is not sufficient to restrict speech, including speech based on the speaker’s identity as a corporation.  There is adequate statute and precedent to pursue quid pro quo (actual, proximate) corruption by corporations and labor unions participating in political speech without needing to subject them to prior restraint based on their identity.

The Court identified precedent separate from Austin which is at odds with Austin.  The Court noted that there is precedent for recognizing the speech rights of corporations.  In First National Bank of Boston v. Belotti, the Court held that speech restrictions based on the speaker’s corporate identity were invalid.  The Belotti line of precedent was at odds with the Austin decision, adding justification to overturn Austin.

President Obama took the extraordinary step of criticizing the Citizens United decision during his 2010 State of the Union speech.  “With all due deference to separation of powers, last week the Supreme Court reversed a century of law that I believe will open the floodgates for special interests – including foreign corporations – to spend without limit in our elections” (http://www.whitehouse.gov/the-press-office/remarks-president-state-union-address).  Supreme Court justices were in the front rows of the US House Chamber as the remarks were delivered.  While there was applause for the President’s statement, Justice Samuel Alito was reported as shaking his head and apparently mouthing the words “not true” as the president spoke (http://www.cnn.com/2010/POLITICS/03/10/obama.supremecourt/).  This moment further illustrated the partisan political reactions to a politically charged judicial decision.

The IRS Scandal

The events that have come to be known as “the IRS scandal” began in February, 2010, just a few weeks after the Citizens United case was handed down by the U.S. Supreme Court.  Multiple Congressional and federal investigations into the activities of the Internal Revenue Service and its leaders are ongoing as of the writing of this article. What has been discovered and reported to date is sufficient to illustrate specific methods for the IRS’s regulatory authority to be used as a partisan tool in political discourse.

It is important to note that the investigations into the scandal itself have become politically charged, to the point where some people apply a ideological litmus test based on whether one believes there is an IRS scandal at all. This paper posits that there is, indeed, an “IRS scandal” based solely on documentary materials currently in the public record (noting that some of the documentary materials are based on oral interviews reported in writing by governmental entities).

According to the timeline contained in the May, 2013 report by J. Russell George, the Treasury Inspector General for Tax Administration (TIGTA), IRS management responded to staff concerns by directing the identification of applications for tax-exempt recognition based on keywords like “Tea Party,” “Patriots,” and “9/12″ “around” March 1, 2010.  This decision by IRS management implies activity by IRS staff during February, 2010 identifying applications for tax exemption that they considered questionable based on keywords and contents indicating potential political activity.  The TIGTA’s report cites a February 25, 2010 e-mail (with all identifying details redacted) which appears to be the staff’s inquiry to management and which the TIGTA places as the first event in the timeline.

The IRS scandal flooded the media during the late spring and early summer of 2013, with a majority of US residents reporting paying close attention or significant attention to the events (http://www.rasmussenreports.com/public_content/politics/general_politics/june_2013/distrust_growing_70_believe_irs_decision_to_target_conservatives_was_made_in_dc). As the investigations started, however, the public turned its attention to other matters, only being reminded of the scandal when Congressional hearings erupted in partisan grandstanding and petty bickering.  President Obama went from saying “The IRS must apply the law in a fair and impartial way, and its employees must act with utmost integrity. This report shows that some of its employees failed that test. I’ve directed Secretary Lew to hold those responsible for these failures accountable, and to make sure that each of the Inspector General’s recommendations are implemented quickly, so that such conduct never happens again. But regardless of how this conduct was allowed to take place, the bottom line is, it was wrong” in May, 2013 (http://www.whitehouse.gov/the-press-office/2013/05/14/statement-president) to saying “bone headed decisions…not even a smidgen of corruption, I would say” by February, 2014 (http://www.foxnews.com/politics/2014/02/02/transcript-bill-oreilly-interviews-president-obama/).  This author wrote a piece for The Nonprofit Quarterly in May, 2014 titled “First Anniversary of IRS Scandal is Largely Unnoticed” (https://nonprofitquarterly.org/policysocial-context/24181-first-anniversary-of-irs-scandal-goes-largely-unnoticed.html).   TaxProf Blog, edited by Paul L. Caron of the Pepperdine University School of Law (http://taxprof.typepad.com/) reports Friday, November 21, 2014 as Day 560 of the IRS scandal.

There was a resurgence of interest when it was found that many of Lois Lerner’s e-mail communications, sought by investigators since June, 2013, appeared to have been lost due to a computer hard drive failure only disclosed to Congress almost a year later.  Shortly thereafter, it was reported that at least six other IRS officials involved in the investigation had similar hard drive failures resulting in loss of e-mails.  The disclosures resulted in a separate ongoing federal investigation of the circumstances surrounding the apparent mechanical failures.

Partisan posturing by representatives of both political parties, sporadic attention by the media, and long delays in the investigation processes have fostered misinformation being accepted as fact.  In popular consciousness, the IRS scandal has drifted toward the bottom of a long list of recent government incidents that include touchpoint names like “Benghazi,” “healthcare.gov,” “Obamacare” (with several story threads), “Fast & Furious,” among others.  Generally speaking, Democrats and other supporters of the President discount the laundry list, while Republicans and other opponents of the President use the list as a whole to assert a pattern of behavior by the Administration.  Regardless, placing the IRS scandal on a list inhibits understanding of the events themselves and their potential affect on future regulation.

While not exhaustive, there are several known facts about how the IRS addressed regulation of nonprofits suspected of political activity.  The seminal document in understanding the IRS scandal is the May, 2013 Treasury Inspector General for Tax Administration (TIGTA) audit titled “Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review”.

There are three key findings in the report, listed on the “highlights” page.  First, the IRS “allowed inappropriate criteria to be developed and stay in place for 18 months.”  Second, the processes the IRS attempted to implement “caused significant delays in processing certain applications.”  Third, the IRS “allowed unnecessary information requests to be issued.”

“Inappropriate criteria” included terms such as “Tea Party,” “Patriots,” ”Take Back the Country,”  “We the People,” and “9/12,” according to the report (the 9/12 Project is associated with radio host and former Fox News commentator Glenn Beck).  “Significant delays” included no work at all being performed on selected applications for 13 months.  “Unnecessary information” refers to the follow-up questionnaires sent by the IRS to applicants asking for donor lists, membership lists, printouts of Facebook accounts and web sites, and even requests for information on an applicant organization’s interactions with a specific named individual.

[The following summary is reproduced in edited form from the author’s story “Inspector General’s Report on the IRS: A Summary” published May 17, 2013 on The Nonprofit Quarterly’s web site.  https://nonprofitquarterly.org/policysocial-context/22316-inspector-general-s-report-on-the-irs-a-summary.html last accessed November 18, 2014.]

Highlights of the TIGTA audit report:

• The singling out of applications for tax exemption based on potential political activity began in February 2010, long before an increase in applications was noted by the IRS.  In fact, the IRS received slightly fewer 501(c)4 applications in 2010 than it did in 2009.  The “influx of applications” the IRS cited as the basis for the detailed scrutiny process didn’t occur until 2011 and 2012 (chart, page 3).
• IRS staff in Cincinnati started looking for “Tea Party or similar organizations” in February 2010, but it was an IRS manager in Washington, not Cincinnati, who first suggested the need for a “sensitive case report” on the Tea Party cases.  The manager supervising the applications processing in Cincinnati agreed.  This happened very early in the process, on April 1-2, 2010.  (Appendix VII)
• The IRS did not single out just some 501(c)(4) applications for detailed review, according to the report (page 9).  They screened 501(c)(3) (charities), 501(c)(4) (social welfare organizations), 501(c)(5) (labor unions and agricultural organizations), and 501(c)(6) (“business leagues”, usually trade and professional associations) applications for evidence of potential political orientation.  Unfortunately, the report does not detail how many applications were selected of each nonprofit type were selected.  However, a footnote on page 12 of the report documents that 89 applications out of 298 (30 percent) were for 501(c)(3) organizations.
• The criteria used to select applications for special scrutiny changed five times between March 2010 and May 2012 (Appendix VI).  Lower level staff and first-line management established criteria – that stayed in place for 18 months – without senior management review and approval.  Lower level IRS staff and first-line IRS management even changed revised criteria directed by senior management without notifying senior management because the lower-level IRS employees believed the approved, revised criteria were too generic.
• The report finds that the selection criteria were only partially successful in targeting the desired applications for review, based on the IG’s review of a random sample of all 501(c)(4) applications closed between May 2010 and May 2012.  This statistical review indicates that: 1) there may have been an additional 185 cases that should have been selected for detailed scrutiny that were not selected; and 2) of the 298 cases that were selected for detailed scrutiny by the IRS, 91 of them (31 percent) with complete documentation should not have been selected for scrutiny in the first place (pages 9-10).
• The IRS’s screening process and the delays in approving or denying tax exemption resulted in some applicants waiting more than three years for a decision.  Approximately half the applications referred to in the report are still awaiting a final decision from the IRS.  The IRS’s own regulations allow an applicant for tax exempt recognition to sue the IRS if their application is not processed within 270 days (pages 15-16).
• The IG’s report made nine recommendations to address the problems.  The IRS agreed with seven of the recommendations and disagreed with two.  The IRS also believed that the problems documented in the report had been solved and that implementing the recommendations would formalize actions already committed to by IRS (Appendix VIII).  The IG flatly disagreed with the IRS’s assessment, as well as with the proposed alternative solutions to the two IG recommendations the IRS took exception to.

The IRS has claimed that its actions to “centralize” processing of applications from groups with potential for political campaign activity was in response to a sudden influx of 501(c)(4) applications between 2010 and 2012.  As stated above, the centralizing and the political keyword-based selection process predates the increase in applications.  There are two additional reasons why this assertion is misleading.  First, the same IRS group, the Determinations Unit, is responsible for processing all applications for tax exemption.  The TIGTA’s audit report looked at numbers of applications from 501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6) organizations (table, page 3).  Taken as a group, the total number of applications declined from 2009 to 2010, and stayed basically flat in 2011.  There was a 14% jump in total applications in 2012 over 2011, but the total of applications received in 2012 was less than six percent higher than the total received in 2009.  [A significant drop in 501(c)(3) applications in 2010 and 2011 accounts for the lower total number.]  Second, as noted above, the IRS was using the selection criteria on not only 501(c)(4) applications, but on some or all of the other categories as well, always also including the largest category, 501(c)(3) applications.

The reason for the work stoppage would be laughable if it weren’t so tragic.  October 2010 is a pivotal month (Appendix VII).  The Tea Party cases were transferred from one IRS staffer (“Determinations Unit specialist”) in Cincinnati to another. Staff in Cincinnati had questions and asked for guidance from the “Technical Unit” at IRS headquarters.  Rather that generating individual letters requesting additional information from applicants, couldn’t a form letter be developed?  After all, the concerns about political campaign involvement were similar or the same in all cases.  Guidance was requested on October 26, 2010.  The Determinations Unit specialist stopped work on all cases while awaiting the answer to the question about developing a form letter.

IRS headquarters did not provide guidance, despite several follow-up requests by IRS field staff and assurances that guidance was forthcoming.  Finally, draft written guidance was issued by IRS headquarters in November 2011.   The first batch of letters requesting additional information from applicants was not sent until January 2012.

Asking a question and waiting more than a year to get an answer is an example of what the TIGTA’s audit report calls “ineffective management.”  One of the factors influencing the ineffective management was the turnover in managerial personnel at the IRS, with issues such as this either getting lost in the transition or requiring new personnel to develop familiarity with the details of their new position responsibilities.  The report also refers to “acting” managers in several instances, further indicating a less than stable management structure.  The Nonprofit Quarterly (NPQ) has reported about the personnel stresses the IRS is facing over the next several years (http://nonprofitquarterly.org/policysocial-context/21778-does-irs-have-resources-to-do-its-increasingly-complicated-job.html).

The initial selection criteria developed in March, 2010 for applications to be selected for special scrutiny included keywords such as “Tea Party,” “Patriots,” ”Take Back the Country,”  “We the People,” and “9/12,” according to the report (the 9/12 Project is associated with radio host and former Fox News commentator Glenn Beck).  [Within the IRS, all cases selected for special scrutiny based on “indicators of significant political campaign involvement” were referred to as “Tea Party cases,” even when other criteria were used for selection.]

Lower-level staff initiated the original criteria without approval from senior management.  These criteria were used for approximately 18 months (early 2010 until summer 2011).  Senior management directed that more general criteria be used after July 2011.  However, lower-level staff believed that the revised criteria were too generic and made changes of their own, without senior management approval, to narrow the criteria in January 2012.  The narrowed criteria were “Political action type organizations involved in limiting/expanding government, educating on the constitution and bill of rights, social economic reform/movement.”  Senior management learned of this change three months later, and issued new criteria in May 2012.  The new criteria were “501(c)(3), 501(c)(4), 501(c)(5), and 501(c)(6) organizations with indicators of significant amounts of political campaign intervention (raising questions as to exempt purpose and/or excess private benefit).”

After a long delay, in January and February 2012 the IRS sent letters to many of the applicants selected for additional screening.  The IG’s report referred to many of the questions asked in these letters as “unnecessary,” which is a mild term for the information being demanded.  Some of the information requests included requests for material (such as donor lists) that would have to be made public as part of an approved application but which would be prohibited from being made public if it were asked of an existing tax-exempt organization.  After media reports of objections to the letters, the IRS reviewed the letters, stopped additional letters from being sent, and extended the time period for applicants to respond to letters already sent (page 19).  The IRS also identified seven specific “unnecessary” questions in the letters (page 20):

1. Requests the names of donors.
2. Requests a list of all issues that are important to the organization and asks that the organization indicate its position regarding such issues.
3. Requests 1) the roles and activities of the audience and participants other than members in the activity and 2) the type of conversations and discussions members and participants had during the activity.
4. Asks whether the officer, director, etc., has run or will run for public office.
5. Requests the political affiliation of the officer, director, speakers, candidates supported, etc., or otherwise refers to the relationship with identified political party–related organizations.
6. Requests information regarding employment, other than for the organization, including hours worked.
7. Requests information regarding activities of another organization – not just the relationship of the other organization to the applicant.

The media reports referenced by the IRS, as well as other media reports, document these and many other intrusive questions and information  being asked of applicant organizations by IRS personnel.  The Nonprofit Quarterly (NPQ) has also reported that groups have been subjected to issue- and belief-related IRS scrutiny as long ago as the 1990s (http://www.nonprofitquarterly.org/policysocial-context/22307-acting-irs-commissioner-miller-resigns-and-targets-stand-up-to-be-counted.html).

The audit report documents much of what we currently know about the scandal, and refutes some of the narrative seeking to downplay or dismiss the IRS’s selective activities regarding applications for tax exemption.

Criticism of the treatment of the IRS scandal as a scandal, and, more specifically, criticism of the May, 2013 TIGTA report, centered on allegations that the report was one-sided (that progressive groups were also targeted), that an allegedly significant increase in 501(c)(4) applications for tax-exempt recognition immediately following the Citizens United decision justified the IRS’s concerns, and that any problems were limited to a few IRS employees in the Cincinnati field office, as Lois Lerner asserted in her May 10, 2013 address to the Tax Section of the American Bar Association.

Although critics charged that the report was one-sided, there is no documented evidence of progressive or liberal groups singled out for scrutiny.  Mr. George responded to a Congressional letter (http://online.wsj.com/public/resources/documents/TIGTAFinalResponseToRepLevin06262013.pdf) by writing that, while the scope of the audit was limited to conservative criteria, one “be on the lookout” memo, or BOLO, (out of five that were found) included liberal-sounding keywords.  However, Mr. George could find no evidence that the BOLO including progressive keywords was ever made operational by the IRS.  An noted above, the TIGTA found in his May, 2013 audit report that lower level IRS staff were changing or ignoring subsequent BOLOs they believed were “too generic” and continued to focus on specific, conservative-sounding keyword search terms.

The claim that there was a “flood” of 501(c)(4) applications was disproved by examining both the timeline and the numbers of applications received by the IRS.  As noted earler, while it’s true that there was a doubling of 501(c)(4) applications from 2009 to 2012 (1,751 to 3,357), this still represented less than 5% of the tax-exemption applications received by the IRS during 2012 for charities, social welfare organizations, labor unions and agricultural organizations, and business leagues.  It’s important to note that the same IRS office handles all applications for these categories.  Applications for 501(c)(5) exemption also doubled from 2009 to 2012, and applications for 501(c)(6) exemption increased by 30% during the same time frame.  Applications for 501(c)(3) exemption comprise over 80% of all applications handled by the IRS Determinations Unit during each of the four years examined by the TIGTA.

Contrary to initial assertions that the singling out of applications was limited to a couple of IRS employees in the Cincinnati office, the TIGTA’s timeline shows early involvement from IRS headquarters in Washington, D.C., including communication to and from Lois Lerner, then Director of the IRS Exempt Organizations (EO) Division.

Much has been made of Lerner as the central figure in the IRS scandal, but investigations are ongoing and it is premature to conclusively state the nature and extent of her knowledge and involvement.  We do know that, in addition to her communications within the IRS, she also shared confidential IRS documents with the Federal Election Commission (FEC) in the form of several IRS Form 1024 applications for tax exemption under Section 501(c)(4) (https://nonprofitquarterly.org/policysocial-context/23172-lerner-supplied-irs-information-on-conservative-groups-to-fec.html).  This action introduces two potential legal issues.  First, while approved applications for tax exemption are generally public record, pending applications are not.  Second, under federal law, the IRS is restricted in how it shares confidential taxpayer information with other federal agencies.

Lerner also sent a “massive database” of confidential taxpayer information to the US Justice Department shortly before the 2010 elections
(http://www.washingtonexaminer.com/irs-send-massive-database-of-tax-exempt-groups-to-fbi-w eeks-before-election/article/2549479?custom_click=rss).  The 21 computer disks were referred to in one FBI e-mail as “incoming data re 501c4 [sic] issues”. According to Congressional investigators quoted, “After the Justice Department turned over the database to the Oversight Committee this month in response to a subpoena, the Justice Department says it was informed by IRS officials that it contains legally protected taxpayer information that should not have ever been sent to the FBI and it now plans to return the full database to the IRS.”

In addition to the Technical Unit and the Determinations Unit at the IRS, the Office of the General Counsel at the IRS was also involved in the “Tea Party cases” beginning in the winter of 2010-2011, according to testimony from a former IRS staff attorney (http://www.nationalreview.com/corner/353654/tea-party-applications-reviewed-irs-chief-couns el-according-testimony-eliana-johnson).  The TIGTA report and other media reports referred to IRS interest in the possible political activities of existing tax-exempt organizations, which required involving the Examinations Unit in Dallas.  This means that IRS offices in Cincinnati, Dallas, and Washington were involved in activities related to the IRS scandal.

Based solely on federal and Congressional investigation reports and other documentary evidence either in the public record or made public as a result of FOIA requests to date, we know several things.  The IRS did target approximately 300 conservative-sounding nonprofit organizations (both applicants and already-approved) for special scrutiny, it pursued many of them in inappropriate ways over a protracted period of time, and at least two IRS field offices in addition to IRS headquarters personnel were involved from the beginning. In the person of Lois Lerner, the IRS shared confidential taxpayer information with two federal agencies (FEC and Justice/FBI), a possible violation of federal law.  The inescapable conclusion is that the IRS scandal is based on verifiable events and warrant complete investigation.

The scandal has already caused a significant change in how the public views the IRS, as noted in the Rasmussen poll cited above.  From the May, 2013 poll report: “…just before Tax Day in mid-April, 42% had at least a somewhat favorable opinion of the nation’s tax collectors. Now only 30% feel that way, while 64% view the agency unfavorably. This includes just four percent (4%) with a Very Favorable view of the IRS and 25% with a Very Unfavorable one.” The announcement by the IRS in summer 2014 that many of Lois Lerner’s e-mails were missing was a spur to even greater skepticism
(http://www.foxnews.com/politics/2014/06/24/fox-news-poll-voters-think-irs-emails-were-deliberately-destroyed/).  Poll results indicated that the public were far more united than elected officials in their view of the scandal.  Majorities of Republicans, Democrats, and independents not only believed that the e-mails were intentionally destroyed, but also agreed that “lawmakers should investigate the IRS ‘until someone is held accountable’”.

Proposed Regulation of 501(c)(4) Political Activity

The IRS scandal and public dialogue surrounding political activity by nonprofit organizations centered around “social welfare” organizations recognized under Section 501(c)(4) of the Internal Revenue Code.  This classification of tax-exempt entity was created in the 1950s as a “catch-all” or miscellaneous category for organizations whose missions and activities were deemed to qualify for tax exemption while not satisfying the specific definitions contained in the other 501(c) categories.  The question of how much political activity was acceptable for an organization created “exclusively for social welfare” was addressed by the IRS in 1959, when it issued guidance indicating that a qualifying 501(c)(4) organization would operate “primarily” for social welfare, generally interpreted as meaning that less than 50% of its activities would be political in nature (see http://www.irs.gov/irb/2013-52_IRB/ar18.html).

Social welfare organizations and their activities went largely unquestioned for decades.  Scrutiny and discussion of social welfare organizations coincides with the rise and recognition of well-funded, politically themed and named 501(c)(4)s in recent years.  These organizations, generally without memberships or affiliation to membership groups, appeared by their branding and activities to be established for political purposes. Despite their stated goals of public education, much of that education sounded like political dialogue intended to influence candidates and elections.

The IRS and Treasury Department sought to draft regulations governing political activity by 501(c)(4) organizations at the same time activities associated with the IRS scandal were underway. In 2012, Lois Lerner inquired as to whether the drafting could be done as an “off- plan” activity separate from the Treasury’s published 2013 work plan (https://nonprofitquarterly.org/policysocial-context/23664-were-new-proposed-irs-nonprofit-regulations-prepared-in-secret.html).

Published in the Federal Register on November 26, 2013, with a standard 90-day comment period, the proposed regulations (http://www.regulations.gov/#!documentDetail;D=IRS-2013-0038-0001) were immediately criticized from all quarters.  In attempting to place Austin-like restrictions on political activity, the proposed regulations would make illegal activities performed for decades by long-standing 501(c)(4)s.  Virtually every aspect of the proposed regulations would require a case-by-case
(“facts and circumstances” in IRS parlance) analysis, promoting precisely the confusion and self- censoring chilling effect foreseen by the Court in Citizens United.  In addition, the proposed regulations applied exclusively to 501(c)(4) groups, ignoring the other classifications of tax-exempt entities targeted by the IRS based on suspected political activity.

Critics immediately noted the timing of the issuance and accused Treasury of attempting to “sneak” the proposed regulations into effect during and following the annual holiday season. There was cynicism expressed in some quarters that the IRS seeking to limit political activity by nonprofits while being actively investigated for its regulatory activities concerning organizations suspected of conservative political activity was unacceptable, or at least premature.  If Treasury sought to avoid public scrutiny and controversy when issuing the proposed 501(c)(4) regulations, it didn’t work.

IRS Commissioner John Koskinen testified that the more than 147,000 public comments received were double the number of comments received on all proposed Treasury regulations during the preceding seven years
(https://nonprofitquarterly.org/policysocial-context/23991-irs-signals-delay-in-new-nonprofit-pol itical-activity-regulations.html).  Even allowing for an unusually large number of general and even off-topic comments from members of the general public, there were more than enough comments from political and nonprofit entities and their representatives to require an extensive cataloguing process.  Ultimately, given both the number and overwhelmingly negative nature of the comments, the IRS announced it was withdrawing the proposed regulations and redrafting them for re-release, presumably in late 2014 or early 2015.

One option for drafting 501(c)(4) regulations has been proposed by The Bright Lines Project (BLP) (http://www.brightlinesproject.org/), a project of the Public Citizen organization. Their web site includes their own proposed regulatory guidelines (http://www.brightlinesproject.org/solutions/), which preceded the IRS’s proposal. [In fact, BLP came out in mild opposition to the IRS proposal, citing shortcomings and recommending a redrafting using BLP’s own work as a model (http://www.citizen.org/documents/BLP_Reaction_To_IRS_NPRM.pdf).] One salutary facet of BLP’s concerns about the proposed regulations was that the regulations singled out 501(c)(4) organizations rather than addressing political activity by the broader tax-exempt sector.

The Bright Lines Project’s model, while in some ways superior to the IRS proposed regulations, suffers from some of the same limitations and shortcomings.  The BLP web site acknowledges, and attempts to address, the difficulties and ambiguities associated with regulation of political speech and political activity. However, the BLP materials include no less than 35 “facts and circumstances” tests to illustrate what would – and would not – be permissible should the Project’s proposals become law.

Conclusion

Both the IRS scandal and recent regulatory efforts centering on nonprofit political activity illustrate some of the dangers identified by the Court’s majority in the Citizens United case.

Under Citizens United and McCutcheon, political speech and political activity is protected speech except in the most extreme cases, regardless if the identity of the speaker. Restrictions are justified only when proximate, actual, serious harm would result from refraining to regulate.  Any regulations must be drafted with a light touch and a bias for permitting unfettered access to the marketplace of ideas by all comers.

The dangers of the potential for corruption (as opposed to actual corruption), the potential for factual error and misinformation of the electorate, and even the opportunity for unnamed donors to influence the political system are certainly present. However, the Court found, and subsequent events associated with the IRS scandal have demonstrated, that the dangers associated with the liberty of political participation are less injurious to our polity than is the potential for government to inhibit political speech through attempts to regulate political expression, the informal self-censorship of individuals and groups resulting from unclear rules and procedures, and government officials inserting their own partisan interpretations of political speech and organization into regulation.  Using the power of the government to authorize or deny the opportunity to assemble in organizational groups for the purpose of participating in national dialogue is more than damaging to free and open political dialogue; it contains the potential for damaging the public’s confidence in government itself.

The future of political activity by nonprofit organizations, especially 501(c)(4) organizations, will need to be geared toward the relative freedom that it has traditionally enjoyed, rather than the regulation and restriction that the overturned Austin case would have countenanced.  Rather that treating political speech and political involvement as something to be made more scarce and allocated only through approved channels, nonprofit organizations of all persuasions should be prepared to operate in a market of abundance and opportunity to attract resources, supporters, and attention with a minimum of governmental interference.