Regulating the Political Speech of Noncharitable Exempt Organizations after Citizens United

A. Taxation with Representation v. Regan

TWR, the key case for analyzing tax limits on exempt organizations' political speech, involved a challenge to the lobbying limits on section 501(c)(3) organizations. TWR challenged, under both the First Amendment and the equal protection clause of the Fifth Amendment, limits on lobbying applicable to section 501(c)(3) organizations. The opinion of the Court, authored by Justice Rehnquist, rejected the First Amendment challenge on the grounds that “Congress has merely chosen not to pay for TWR's lobbying.”11 It viewed both exemption and deduction as a form of subsidy: “A tax exemption has the same effect as a cash grant to the organization of the amount of tax it would have to pay on its income. Deductible contributions are similar to cash grants of the amount of a portion of the individual's contributions.”12 Congress, the opinion continued, is not required to subsidize First Amendment activity and can choose to subsidize lobbying less extensively than other activities that section 501(c)(3) organizations undertake. In the view of the Court, such a selective subsidy did not impose an unconstitutional condition on the exercise of First Amendment rights. Citing Cammarano v. United States,13 the case upholding a regulation denying a business deduction for lobbying expenses, the Court explained that Congress neither infringed nor regulated First Amendment rights by declining to pay for them.

The Court observed that TWR could qualify for exemption under section 501(c)(4), although it would not then qualify for tax-deductible contributions, or could return to the dual structure that it had used in the past, “with a 501(c)(3) organization for nonlobbying activities and a 501(c)(4) organization for lobbying activities.”14 The Court stressed that under the dual structure TWR would have to take care that the 501(c)(3) did not subsidize the 501(c)(4). In a footnote, it rejected the concern of TWR and amici that “the IRS might impose stringent requirements that are unrelated to the congressional purpose of ensuring that no tax-deductible contributions are used to pay for substantial lobbying and effectively make it impossible for a 501(c)(3) organization to establish a 501(c)(4) lobbying affiliate.”15 The Court did not view IRS requirements that the two groups be separately incorporated and maintain records showing that tax-deductible contributions were not used for lobbying as “unduly burdensome.”16

The Court's opinion, in sum, blessed a dual affiliate structure, at least so long as the record-keeping and other burdens were related to the Congressional purpose of not subsidizing substantial lobbying and were not “unduly burdensome” and rejected the First Amendment challenge on the grounds that Congress is not required to subsidize First Amendment activity. It took care to point out that the rules did not single out the content of the speech or aim at suppression of particular ideas.

Justice Blackmun's concurrence, which Justice Brennan and Justice Marshall joined, took a somewhat different approach. If the provisions of section 501(c)(3) were viewed in isolation, it reasoned, excessive lobbying would deny an organization not only the ability to receive tax-deductible contributions for its lobbying activities, but also the ability to achieve tax-exempt status and to receive tax-deductible contributions for any of its activities. Such a consequence would deny a significant benefit to organizations choosing to exercise their First Amendment right to lobby17 and, in his view, would be unconstitutional. In a footnote, Justice Blackmun cited Cammarano, in which Justice Douglas' concurrence contrasted the constitutionally permissible denial of the business expense deduction for lobbying with an unconstitutional denial of all deductions of business deductions for a business that lobbies.18

For Justice Blackmun, avoiding constitutional defect required that a tax-exempt organization be able to set up another tax-exempt affiliate subject to fewer restraints on constitutionally protected speech: “A 501(c)(3) organization's right to speak is not infringed, because it is free to make known its views on legislation through its 501(c)(4) affiliate without losing tax benefits for its nonlobbying activities.” He cautioned, “Any significant restriction on this channel of communication, however, would negate the saving effect of 501(c)(4). … Should the IRS attempt to limit the control these organizations exercise over the lobbying of their 501(c)(4) affiliates, the First Amendment problems would be insurmountable.”19 Justice Blackmun's concurrence thus sounded a note of caution regarding the unconstitutional conditions doctrine, which asks when it is permissible for the government to require waiver of a constitutional right as a condition of receiving some government benefit. Although this doctrine is murky at best,20 under one formulation of its meaning, the government cannot condition acceptance of a government benefit on a burden regarding a constitutional right that extends beyond the scope of the benefit. The burden cannot limit what recipients of the government benefits can do with their own funds or on their own time. If the condition does not extend beyond the scope of the benefit and does not so limit recipients' time or money, the Court generally rejects an unconstitutional condition challenge.21 That is, the unconstitutional conditions doctrine applies only if the government fails to offer a meaningful benefit or at least a benefit commensurate with the condition attached to it. The government, at a minimum, must be offering some benefit for consideration of the doctrine to be triggered. As a result of the ability to establish a (c)(4) lobbying affiliate for the (c)(3) charity, however, the denial of ability to engage in substantial lobbying matches the subsidy of receiving tax-deductible donations while still permitting the organization to lobby on a tax-exempt basis through its affiliate, and TWR's challenge was properly rejected. The limit on lobbying by section 501(c)(3) organizations did not impose an unconstitutional condition, although it affected the entity's First Amendment rights.

The Court's opinion and concurrence differ regarding the significance of the affiliate structure and the importance of the alternate channel of communication. In the Court's opinion, the ability to create a controlled affiliate was permissible and useful. In Justice Blackmun's concurrence, it shifts to being a constitutionally required structure, crucial to upholding under the First Amendment the 501(c)(3) limits on lobbying. The nature of the impermissible burden the IRS might impose shifts as well, from one having to do with its purpose and with administrative and record-keeping burdens to one centering on control.

While the facts of TWR involved limits on lobbying, its approval of affiliates for expression of political speech has implications for, and has been applied in, the context of politicking as well. Both the Court's opinion and the concurrence rely on an earlier case, Cammarano, however, and we will turn to that case, TWR's ancestor, before turning to the cases that followed it.

B. Taxation with Representation v. Regan's ancestors: Slee and Cammarano

The Court in TWR stated that Cammarano v. United States,22 a 1959 case, controlled its First Amendment analysis. Cammarano involved for-profit taxpayers and the proper tax treatment of expenses for lobbying the public. In Cammarano, individual and corporate taxpayers challenged a regulation dating back to 1918 that interpreted the statute permitting a deduction for ordinary and necessary business expenses as denying business deductions for lobbying expenses.23 The taxpayers, both involved in sale of alcohol, had contributed money to associations that had run advertisements against state alcohol initiatives, with one initiative calling for state control and the other state prohibition. The Court's opinion, authored by Justice Harlan, rejected taxpayers' arguments that the regulation applied only to direct dealings with legislators or that the Court should exempt from the regulation's reach sums expended to preserve the taxpayer's business from destruction.

The opinion also looked to Learned Hand's analysis in Slee v. Commissioner.24 Slee had affirmed the decision of the Commissioner of Internal Revenue and the Board of Tax Appeals that disallowed deductions for gifts to the American Birth Control League because the League was not a “corporation … organized and operated exclusively for religious, charitable, scientific, literary or educational purposes,” as required for deductibility under the Internal Revenue Act of 1921. That is, the statute at the time did not explicitly refer to or explicitly permit any amount of lobbying.25 The League's charter included among its objectives: “To enlist the support and co-operation of legal advisors, statesmen and legislators in effecting the lawful repeal and amendment of state and federal statues which deal with the prevention of contraception.”

Judge Hand was willing to countenance lobbying “ancillary to the end in chief,” such as a society of booklovers working to “relax the taboos upon works of dubious propriety” or even the Birth Control League seeking to change the law “in order to better conduct its charity.”26 But lobbying as an independent mission rather than in service of its charitable activities, he reasoned, went beyond the statutory bounds. As a result, the opinion concluded that the Board did not err in denying deduction for contributions to the League; its lobbying purpose and activities prevented it from being exclusively charitable. Judge Hand wrote, in language quoted by the Court in Cammarano, “Political agitation as such is outside the statute, however innocent the aim. … Controversies of that sort must be conducted without public subvention; the Treasury stands aside from them.”27

Relying on Slee, the Court in Cammarano, wrote, “The Regulations here contested appear to us to be but a further expression of the same sharply defined policy”28 and a “determination by Congress”29 not to permit deductions for lobbying. The Cammarano Court found the policy sharply defined even though Judge Hand had simply inferred a policy against public subvention. It was nowhere stated by Congress in 1930, and Judge Hand in Slee did not even refer to the then-existing Treasury regulations that forbade lobbying. At the time of Cammarano, the policy was a small matter of administrative rule and case law; it was nowhere embodied in an explicit statutory statement. Moreover, as the Court recognized earlier in the opinion,30 at the time of Cammarano, unlike the time of Slee, charities were permitted to engage in some lobbying, making the policy less than sharply defined.

In his concurrence, Justice Douglas emphasized the First Amendment issue in his concurrence, and TWR relied primarily on Justice Douglas' opinion. Justice Douglas' concurrence opened by asserting that the First Amendment extends to speech undertaken with a profit motive, including the taxpayers' speech at issue in the case. Since they were exercising First Amendment rights, he wrote, Congress could not penalize them for this exercise. Had Congress denied corporations engaged in lobbying all deductions for ordinary and necessary business expenses, Congress would have been subjecting them to a penalty. Allowing some, but not all, deductions, however, is not a penalty, because deductions are a matter of legislative grace.31 Justice Douglas dismissed the notion that this item of expense must be allowed as a deduction, because it would “savor of the notion that First Amendment rights are somehow not fully realized unless they are subsidized by the State,” a view that “runs counter to our decisions.”32 It is Justice Douglas' subsidy language from Cammarano that has endured and shaped TWR's First Amendment discussion in both the Court's opinion and Justice Blackmun's concurrence.

If deductions, even for business expenses are seen as a subsidy, Justice Douglas's concurrence demonstrates neatly the unconstitutional conditions doctrine. Businesses' acceptance of the benefit of deducting their other ordinary and necessary expenses as well as other tax credits and incentives is conditioned on their not having a deduction for lobbying expenses. If they were denied all business deductions, there either would be no benefit on which to attach a condition or the condition would no longer be proportionate to the benefits the business obtains under the tax code, such as credits or other incentives that may exist.

The cases about deductions for lobbying in the charitable and in the business context exhibit an odd interdependence. Each depends on rules applicable to the other sector, in ways not always accurate, in defining the policy baseline. Cammarano, the case finding constitutional a regulation denying a business deduction for lobbying, depends on Slee, the case that found permissible denial of a charitable contribution deduction for an organization that had lobbying as a stated mission, to find a sharply defined congressional policy that the facts do not seem to support.33 The statute which Slee had interpreted had been changed by the time of Cammarano to permit some lobbying. The policy at issue in Cammarano was an administrative one, adopted by Congress only by reenactment, a slim basis for a sharply defined policy. TWR, which considered the limits on charitable lobbying, in turn relied on the regulation forbidding a deduction for lobbying by businesses upheld in Cammarano, although at the time of TWR businesses were in fact allowed by statute to deduct the costs of direct lobbying. Furthermore, the cases assume that the availability of a tax benefit, whether a deduction or an exemption, in fact provides a subsidy, without considering, for example, the extent to which deductions were in fact claimed by contributors. The cases operate by assumption as much as by analysis.

C. Case law after Taxation with Representation

The first two circuit court tax cases that relied on TWR, American Society of Association Executives v. United States34 and Branch Ministries v. Rossotti,35 failed to distinguish the Court's opinion in TWR and Justice Blackmun's concurrence. They instead treat Justice Blackmun's concurring opinion as if it were part of the opinion of the Court.

In American Society of Association Executives,36 a coalition of trade associations challenged changes to tax provisions regarding the nondeductibility of lobbying expenses. Amendments to section 162(e) and section 6033 in 1993 included provisions designed to ensure that taxpayers could not deduct dues paid to tax exempt organizations to the extent that such organizations engaged in lobbying. Under the 1993 legislation, a tax exempt organization that engages in lobbying funded by tax-deductible membership dues and other contributions must either pay a “proxy” tax on its lobbying activities or follow notification “flow-through provisions.”37 The proxy tax is imposed at the highest marginal rate of the corporate income tax on all lobbying expenses of the tax exempt organization, as defined in section 162(e)(1). The flow-through option requires the organization to provide all donors or other contributors with a reasonable estimate of the portion of dues or other contributions that is allocable to expenditures not deductible under section 162.

The court extrapolated from TWR to split the 501(c)(6) organization into two such organizations, “one that engaged exclusively in lobbying and one that completely refrains from lobbying,”38 one for which members can take a deduction for dues and one for which it cannot. With such a structure, the court explained, only rational basis scrutiny is required, and it looked to the Supreme Court's opinion in TWR to justify the dual affiliate structure and the level of review.39 In particular, it relied on language from TWR accepting IRS requirements designed to ensure that tax-deductible contributions do not pay for substantial lobbying. The court concluded that the scheme in section 6033 overall bore a rational relation to the legitimate governmental purpose of withholding the benefits of tax deductibility from lobbying.

In TWR the organization had previously structured itself as an affiliated 501(c)(3) and (c)(4). In American Society of Executives, the court itself suggested the structure of paired (c)(6) organizations. In doing so, it also took an analytical leap. It assumed it was applying the Court's opinion in TWR,40 when it in fact applied the approach of the TWR concurrence. It was the TWR concurrence that stressed as crucial the availability of an alternate channel. But American Society of Executives applied the TWR concurrence only superficially, with its too clever Solomonic splitting of the baby into two 501(c)(6) organizations. The section 501(6) organization that lobbied would still have to pay the proxy tax or follow the notification flow through provisions.

The court in American Society of Executives avoided grappling with the unconstitutional conditions argument underpinning the TWR concurrence. The unconstitutional conditions argument as applied to section 6033(e) would question whether a proxy tax can be imposed on one entity in order to ensure compliance by another entity, since the proxy tax undermines any tax benefit that exemption provides to a section 501(c)(6) trade association.41 However reasonable a proxy tax may be from an economic point of view, it is possible that it fails to pass muster under an unconstitutional condition analysis. It may well be that, in the case of the section 6033(e)(2) proxy tax, the availability of the notification alternative suffices to answer the unconstitutional conditions argument because it offers a tax-free alternative. Yet, notification also imposes an administrative burden and cost on the section 501(c)(6) for its decision to engage in lobbying. The appellate court, however, did not analyze these difficult questions.

In Branch Ministries v. Rossotti,42 the D.C. Circuit applied TWR to the rules prohibiting politicking rather than those limiting lobbying by section 501(c)(3) organizations. It affirmed revocation of a church's exemption for violating the prohibition on intervention in a political campaign. The church had placed full-page advertisements in two national newspapers four days before the presidential election urging Christians not to vote for then-presidential candidate Bill Clinton because of his positions on abortion, homosexuality, and birth control for teenagers. Each advertisement also asked for tax-deductible contributions.

The church's challenges to its revocation included the First Amendment argument that it was substantially burdened by lack of an alternate means by which to communicate its sentiments about candidates to public office. In rejecting this argument, the court viewed the Blackmun concurrence as the holding in TWR. Thus, TWR meant that “the availability of … an alternate means of communication is essential to the constitutionality of section 501(c)(3)'s restrictions on lobbying.”43 The court found that the church could establish a section 501(c)(4) organization, which in turn could establish a political action committee under the federal election laws to communicate these sentiments.

It rejected the practical problems of such a structure raised by counsel for the Church, who at oral argument “doggedly maintained that there can be no ‘Church at Pierce Creek PAC.”44 The court was satisfied that with a 501(c)(4) intermediary “the church can initiate a series of steps that will provide an alternate means of political communication that will satisfy the standards set by the concurring justices in [Taxation with Representation v.] Regan”45 At the time of Branch Ministries, setting up a 501(c)(4) required no more than it had at the time of TWR. As the court observed, a political action committee need be no more than a separate segregated fund. But the case did not pause for a even moment to ask whether having to form both a section 501(c)(4) and a political action committee (PAC) subject to regulation by the FEC might be too great a burden under TWR.46

Both these cases evidence a too quick acceptance of the TWR concurrence. Both assume special purpose affiliates will solve the problem presented, without careful consideration of the purpose of the exempt organization to be established or the relationship between the entities they are so eager to establish. American Society fails to recognize that a pair of section 501(c)(6) organizations does not resolve the unconstitutional condition issue that undergirds both Justice Blackmun's concurrence in TWR and the provisions being challenged in the case. Housing all lobbying activity in a separate section 501(c)(6) entity does not resolve any of these issues; the relationship between two section 501(c)(6) organizations does not parallel a paired 501(c)(3) and 501(c)(4), which are subject to different rules. Similarly, Branch Ministries does not inquire with sufficient detail as to whether it is feasible for an individual church to maintain a section 501(c)(4) organization that in turn has a PAC or whether the burden of such a tripartite structure might run afoul of TWR. Both of these Circuit Court opinions adopt the easy aspects of the Court's opinion and the Blackmun concurrence in TWR without grappling with their more difficult implications.

The most recent tax case relying on TWR, Mobile Republican Assembly v. United States47 was satisfied with citing to Court's opinion in TWR without any mention of Justice Blackmun's concurrence. As a result, it avoided the consideration of proportionality of benefit and burden that the concurrence at least implicitly demanded.

Mobile Republican Assembly was a declaratory action brought to challenge the 2000 amendments to section 527. These amendments added sections 527(i) and 527(j) to the Internal Revenue Code.48 The provisions were enacted in response to the growth of section organizations under section 527 that engaged in issue advocacy intended to influence federal elections without being subject to regulation by the Federal Election Commission.49 Section 527(i) requires that a political organization give notice to the Secretary of Treasury in order to receive tax-exempt treatment for amounts received to influence campaigns. Section 527(j) requires organizations that have given such notice to disclose the name, address, and occupation of each contributor of $200 or more in aggregate during a calendar year and disclose the name and address of each recipient of $500 or more in aggregate made to any person during a calendar year.50

The Eleventh Circuit, vacating the district court's decision,51 viewed the requirements of section 527(j) as conditions imposed upon the receipt of a voluntary tax subsidy and as part of an overall tax scheme. As such, injunctive relief was barred, and the suit had to be dismissed for lack of jurisdiction. In reaching its conclusion, the court looked exclusively to TWR. It quoted the statement from Justice Rehnquist's opinion in TWR that tax exemptions were a form of subsidy and described the prohibition against lobbying as “a legitimate, congressionally-mandated component of the voluntary tax exemption.”52 Further, according to the circuit court, “The Court observed that TWR remained free to receive tax-deductible contributions for non-lobbying activities and to engage in lobbying using other financial resources.”53 While this characterization of TWR may seem to rehearse the alternate channel language of Justice Blackmun's TWR's concurrence, Mobile Republican Assembly did not go on to make such an alternative crucial to its decision or to consider the match between the benefit and burden. It moved instead to the argument from Justice Rehnquist's opinion in TWR that Congress has no obligation to subsidize speech. It quotes TWR: “Although TWR does not have as much money as it wants, and thus cannot exercise its freedom of speech as much as it would like, the Constitution does not confer an entitlement to such funds as may be necessary to realize all the advantages of that freedom.”54

To the court in Mobile Republican Assembly, section 527(j) fell within the contours of TWR as “certain requirements that must be followed to claim the benefit of a public tax subsidy.”55 In order to come within this framework, the opinion viewed as voluntary the initial decision by a political organization to register under section 527 so that its campaign-related income would be treated as tax-exempt. “Any political organization uncomfortable with the disclosure of expenditures or contributions may simply decline to register under section 527(i) and avoid these requirements altogether. The fact that the organization might then engage in somewhat less speech because of stricter financial constraints does not create a constitutionally mandated right to the tax subsidy.”56 The court reached this conclusion regarding section 527(i) without any discussion of the seemingly contradictory language of some provisions of section 527, as discussed in more detail below.57

Moreover, “the fact that some self-declared section 527 organizations may later choose to withhold disclosure and, as a result, may pay more in taxes than they would have paid without tax-exempt status” did not trouble the court because it understood “the consequences of violating the conditions of the subsidy” as simply “part of the tax framework.”58 In this statement, the opinion's reliance on the Court's opinion rather than the concurrence in TWR became manifest. That the condition can exceed the benefit troubled it not at all, or, at least not in a case that it views as subject to the Anti-Injunction Act and thus not yet subject to a careful scrutiny of the benefit and burden.

It is Citizens United that has gone into exquisite and agonizing detail describing the kinds of burdens exempt political organizations face today, and thus a return to the Court's opinion in TWR combined with the concerns articulated in Citizens United, as described below, might lead to reconsideration of the tax rules we have long taken for granted regarding political activity for tax-exempt organizations.

D. Citizens United

In Citizens United, the Supreme Court by a 5–4 vote struck down on First Amendment grounds a provision of the federal campaign finance laws that prohibit corporations and unions from using their general treasury funds to make independent expenditures59 for electioneering communications or for speech expressly advocating the election or defeat of a candidate. By a vote of 8–1, it upheld disclaimer provisions, which require that televised electioneering communications state who was responsible for the content, and disclosure provisions for anyone spending more than $10,000 on electioneering communications in a calendar year identifying the name of the person making the expenditure, the amount of the expenditure, the election to which the communication was directed, and the names of certain contributors.

The case involved Citizens United, a section 501(c)(4) organization, which had made a 90-minute movie about then-Senator Hillary Clinton (“Hillary”). Citizens United wished to make the movie available through video-on-demand and produced advertisements to promote it. Concerned that its release would violate the ban on electioneering communication funded by corporate treasury funds,60 and thus subject it to civil and criminal penalties, it sought declaratory and injunction relief against the FEC before the District Court. The District Court denied its motion for preliminary injunction and granted the FEC's motion for summary judgment. After the Supreme Court noted probable jurisdiction and oral arguments were held, the Court heard reargument after asking the parties to file supplemental briefs to address whether Austin v. Michigan Chamber of Commerce61 and parts of McConnell v. Federal Election Commission,62 cases that had upheld the facial validity of the provision prohibiting the use of corporate and union general treasury funds for independent expenditures, should be overruled.

Justice Kennedy wrote the opinion of the Court. He first rejected a number of narrower bases for resolving the case. According to Justice Kennedy, video-on-demand came squarely within the statutory term “electioneering communication;” the film was equivalent to express advocacy,63 and the Court could not invalidate the provision as applied to video-on-demand, or allow an exception to the expenditure ban for “nonprofit corporate speech funded overwhelming by individuals.”64 As to the last suggestion, the opinion protested that applying a de minimis standard “would require case-by-case determinations;” and such a process would be objectionable because “archetypical political speech would be chilled in the meantime.”65

The opinion next engaged in a lengthy discussion of as applied and facial challenges, a discussion that bears upon consideration of the current tax regime. Justice Kennedy tied the need for considering the facial validity of the provision closely to its chilling effect on speech that is of “primary importance” to the “integrity of the election process.” His opinion described with seeming horror the FEC's 568 pages of regulations, 1,278 pages of explanations and justifications for those regulations, and 1,771 advisory opinions since 1975 and a two-part 11-factor balancing test to determine an “appeal to vote” test for determining whether a communication was the functional equivalent of express advocacy.66 To the court, these efforts to provide guidance were an “onerous restriction” that “function as the equivalent of prior restraint by giving the FEC power analogous to licensing laws implemented in 16th- and 17th-century England, laws and governmental practices of the sort that the First Amendment was drawn to prohibit.”67 Thus, the FEC is a “censor” that “has created a regime that allows it to select what political speech is safe for public consumption by applying ambiguous tests.”68 Instead of eschewing “the open-ended rough-and-tumble of factors,”69 the opinion continued, the FEC has embraced them, creating “an unprecedented governmental intervention into the realm of speech.”70

The opinion then examined the validity of the provision on its face under the First Amendment. It characterized the provision as an “outright ban, backed by criminal sanctions.”71 It acknowledged that a PAC created by a corporation can engage in express advocacy and electioneering communications, but rejected the argument that a PAC can speak for the corporation that created it because a “PAC is a separate association from the corporation.”72

Justice Kennedy next wrote, with language also important to consideration of current tax rules:

Even if a PAC could somewhat allow a corporation to speak—and it does not—the option to form PACs does not alleviate the First Amendment problems with §44(b). PACs are burdensome alternatives; they are expensive to administer and subject to extensive regulations. For example, every PAC must appoint a treasurer, forward donations to the treasurer promptly, keep detailed records of the identities of the persons making donations, preserve receipts for three years and file an organization statement and report changes to this information within 10 days.73

The opinion went on to describe the detailed monthly reports that PACS must file with the FEC, due at different times, depending on the type of election.74

The prohibition on corporate independent expenditures, according to the Court, “could repress speech by silencing certain voices at any of the various points in the speech process.” Because speech “is an essential mechanism of democracy” as “the means to hold officials accountable to the people,” laws, such as this one, which burden political speech, are subject to strict scrutiny.75 For Justice Kennedy and the four Justices who joined his opinion, the First Amendment is “[p]remised on mistrust of government power” and “stands against attempts to disfavor certain subjects or viewpoints “because [s]peech restrictions based on the identity of the speaker are all too often simply a means to control content.”76 Moreover, “government may not … deprive the public of the right and privilege to determine for itself what speech and speakers are worthy of consideration.”77

Justice Kennedy then reassessed Supreme Court case law regarding corporate political spending. His opinion concluded that the law prior to Austin did not support Austin's holding that upheld the ban on corporate independent expenditures. The Citizen United majority read Austin as relying on an “antidistortion rationale,” that is, in “preventing ‘the corrosive and distorting effects of immense aggregations of wealth that are accumulated with the help of the corporate form and that have little or no correlation to the public support for the corporation's political ideas.”78 Justice Kennedy unequivocally rejected this rationale, reasoning it could permit the banning of books and the speech from media corporations. Neither could the special rights granted corporations, such as limited liability and perpetual life, justify such abridgement of First Amendment rights. “It is rudimentary that the State cannot exact as the price of those special advantages the forfeiture of First Amendment rights.”79

Justice Kennedy also repudiated anticorruption as a justification for the provision because, according to the opinion, independent expenditures “do not give rise to corruption or the appearance of corruption.”80 The evidence offered for the conclusion appears to be that 26 States do not restrict independent expenditures by for-profit corporations and the “Government does not claim that these expenditures have corrupted the political process in those States.”81

Finally, the opinion discarded a shareholder protection basis for the provision. Such a basis, it explained, would also apply to media corporations. Furthermore, it is both under and overinclusive in that it is not logically limited to a short period before an election and does not logically apply at all to nonprofit corporations.

The opinion then justified abandoning stare decisis on the grounds that Austin was not “well reasoned,”82 the government did not defend it well,83 the case was “undermined by experience,”84 and “no reliance interests”85 were at stake.” The Court proceeded to overrule the case and that part of McConnell upholding the electioneering provision.

All of the Justices except Justice Thomas joined the next part of the Court's opinion, which upheld disclaimer and disclosure provisions.86 Such requirements, Justice Kennedy wrote, while they burden the ability to speak, they ‘’impose no ceiling on campaign-related activities.”87 Thus, they “are subject to exacting scrutiny,” which requires a “substantial relation between them and a sufficiently important government interest.”88 Justice Kennedy found that the same interest that sustained facial challenges to such provisions, namely helping citizens to “make informed choices in the political marketplace,” applied here.89 Moreover, because “disclosure is a less restrictive alternative to more comprehensive regulations of speech,” the disclosure requirement need not be limited to speech that is the functional equivalent of express advocacy.90

Citizens United argued that disclosure requirements can chill donations to an organization by exposing donors to retaliation, but the Court concluded that it had not made a showing of harassment or retaliation in its case. In fact, the “First Amendment protects political speech; and disclosure permits citizens and shareholders to react to the speech of corporate entities in a proper way. This transparency enables the electorate to make informed decisions and to give proper weight to different speakers and messages.”91

Chief Justice Roberts, joined by Justice Alito, wrote a concurring opinion explaining why the principles of judicial constraint and stare decisis nonetheless permitted overruling Austin. Justice Scalia, joined by Justice Alito and Justice Thomas in part, wrote a concurring opinion disputing Justice Stevens's account of the original understanding of the First Amendment. Justice Stevens, along with Justices Ginsburg, Breyer, and Sotomayor, issued a lengthy opinion concurring on the disclaimer and disclosure provisions, but dissenting on all other aspects of the Court's opinion. At the conclusion of his opinion, Justice Stevens said that the Court's decision “elevates the majority's agenda over the litigants' submissions, facial attacks over as-applied claims, broad constitutional theories over narrow statutory grounds, individual opinions over precedential holdings, assertion over tradition, absolutism over empiricism, rhetoric over reality.”92 Finally, Justice Thomas dissented for himself alone on the constitutionality of the disclaimer and disclosure provisions.

Language in the Court's opinion raises questions about limits on political speech by noncharitable tax exempt organizations and the affiliate structure as a means to comply with the tax laws. The majority opinion seems ambivalent about disclosure, both welcoming it and calling attention to its burdens.93 The Court's opinion is also highly critical of multifactor tests in the context of political speech. In order to consider the possible impact of both Citizens United and the principles of TWR on the current rules for political speech for exempt organizations, we must, of course, review the current rules. Such is the purpose of the next section.

A. Lobbying rules

B. Politicking

A. Definitions of political activity

B. No duty to subsidize versus no limits on political speech

As discussed earlier, politicking cannot be the primary activity of section 501(c)(4), (c)(5), and (c)(6) organizations. Even if we do not know precisely what “primary activity” means, we know that these organizations are limited in the amount of politicking in which they engage and that they must engage in other activities that are their primary purpose. The assertion in Citizens United that “[n]o sufficient governmental interest justifies limits on the political speech of nonprofit or for-profit corporations”248 seems difficult to reconcile with the statement in the Court's opinion in TWR that “Congress is not required by the First Amendment to subsidize lobbying,”249 a statement that permitted limitations on one type of political speech, namely lobbying, in the context of the case.

The quotation from Citizens United, however, must be understood to mean that the government had not supplied an interest sufficient to meet the strict scrutiny test that the Court applied in the case. A government interest insufficient to justify limits on the political speech of corporations in Citizens United because it is not compelling could easily suffice for a tax provision under the rational relation test of TWR. A decision by Congress to have a different set of rules for tax exempt organizations with a primary purpose of politicking, because, for example, of the needs of the citizenry for additional disclosure, would seem sufficient to pass the rational relation test.

The rational relation test applies to a tax provision, however, only if it does not violate the First Amendment. The Court's opinion in TWR cautioned, “The case would be different if Congress were to discriminate invidiously in its subsidies in such a way as to ‘aim[ ] at the suppression of dangerous ideas.’”250 The quoted language traces back ultimately to Speiser v. Randall,251 where the Court had held unconstitutional a California rule requiring those who sought a property tax exemption to sign a declaration stating that they did not advocate the forcible overthrow of the government.252 The Court in TWR rejected the organization's contention that the limitation on lobbying for section 501(c)(3) organizations imposed an unconstitutional condition like that in Speiser. It explained that the Code did not deny TWR “any independent benefit on account of its intention to lobby.”253

Justice Kennedy in Citizens United quoted the seemingly absolute statement from Justice Scalia's dissent in Austin: “It is rudimentary that the State cannot exact as the price of those special advantages [granted corporations, such as limited liability and perpetual life] the forfeiture of First Amendment rights.”254 To understand the import of this quotation, it is important to go back to its source. In Austin, Justice Scalia cited Speiser as authority for the statement, the same case on which TWR relied.255 Thus, it, too, is a statement of the unconstitutional conditions doctrine. The state cannot deny an independent benefit, such as state law corporate privileges, as a condition of the forfeiture of First Amendment rights. The benefits and burdens are not proportional.

But not all conditions are unconstitutional. Refusing to subsidize a First Amendment right, according to the Court's opinion in TWR, did not deny that right and was not an unconstitutional condition.256 If exemption is a subsidy, granting exemption can be conditioned on limiting the extent of the organization's politicking. TWR, however, took for granted that both tax exemption and the charitable contribution deduction provide subsidies. Because the organization bringing the case was a section 501(c)(3) organization with donors entitled to take deductions for charitable contributions, there was little occasion for the organization to test the assumption regarding exemption, such as pointing out that the tax expenditure budget lists the charitable contribution deduction but not exemption as a tax expenditure.257

If we focus on the limits on politicking applicable to noncharitable section 501(c) organizations, however, the question of whether exemption itself provides a subsidy cannot be avoided. Contributions to none of these organizations are eligible for an income tax deduction (either as a charitable deduction or a business deduction). There is no statutory basis for a gift tax deduction. Exemption is the only candidate for possible subsidy. Thus, we must ask whether we view the exemption from tax on income in the same way and as a subsidy for all noncharitable section 501(c) organizations.

Scholars who have considered the issue have taken very different views. In their classic article, The Exemption of Nonprofit Organizations from Federal Income Tax, Bittker and Rahdert classified political organizations and section 501(c)(4) organizations along with section 501(c)(3) organizations as public service organizations that should be exempt from income tax because there is no satisfactory way either to define and compute their income or to fit the tax rate to the ability of their beneficiaries to pay.258 They viewed unions and business leagues along with social clubs and consumers' cooperatives as mutual benefit organizations operated to provide goods and services to their members at cost.259 Exempting the accumulated income of a business league or union was “the equivalent of currently imputing its income to its members but allowing them to deduct these amounts when they are ultimately used,” allowing members to pay lower dues in future years, or allowing the organization to expand activities without additional cost in future years, all activities that “will compensate the Treasury, albeit belated, for the revenue lost by exempting the … income when realized … except for the time value of money.”260 Moreover, the authors did not seem especially concerned with the time value of money lost to the Treasury.

Henry Hansmann in The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation famously disputed Bittker and Rahdert's contention that we cannot construct a workable definition of income for nonprofits.261 Even for nonprofits that depend on donations, such as the Red Cross, he urged conceptualizing the donor as buying the product or service the organization provides. In the case of the Red Cross, for example, the services provided would be disaster relief.262 Without exemption, tax would apply to earnings saved for expenditures in future years and net capital investment, which Hansmann called retained earnings. Exemption thus operates as a subsidy for capital that nonprofit exempt organizations cannot raise from private investors. Under Hansmann's analysis, then, it would seem that exemption of tax on retained earnings of section 501(c)(4) organizations would also be seen as a subsidy. Hansmann criticized the exemption for social clubs because the members themselves could provide capital,263 but did not discuss 501(c)(5) or (6) organizations as such.

Daniel Halperin built on Hansmann's work to undertake such an analysis for section 501(c)(5) and section (6) organizations.264 He viewed the goal in taxing such entities to be the proper measure of income rather than provision of any special subsidy. He largely accepted Bittker and Rahdert's analysis, but, unlike them, assigned great significance to the time value of money. “Since member dues, and for that matter investment and other income, might not be used for business expenses until a future taxable period, then failure to tax such income when received results in tax deferral for the association.”265 He reviewed a number of mechanisms to end the deferral: permitting deductions only when expenditures were incurred; allocating excess of current income over deductions back to members; and a 2000 Treasury proposal to tax the investment income of section 501(c)(6) organizations. He determined the taxation of investment income to be less accurate but simpler to administer than other alternatives, dubbing it “an indirect way of eliminating the benefit of deferral.”266

Halperin acknowledged that, on one hand, if we eliminate or mitigate the deferral benefit for trade associations exempt under section 501(c)(6), we should do the same for labor unions exempt under section 501(c)(5), but, on the other, the 2% floor on miscellaneous itemized deductions under section 67 complicated the issue.267 Because of the 2% floor, most union dues are not in fact deductible and the deferral provided at the entity level might be seen as providing a kind of rough justice for the denial of the deduction. He ultimately concluded that it is probably best to “ignore the 2% floor in determining the treatment of unions on the grounds that it is an anomaly in the Code that should be modified rather than offset on an ad hoc basis.”268

Not all investment income of unions, if distributed to their members, would be returned to the union as a deductible expense, even in theory. Unions often invest income to build up strike funds, and strike funds distributed to members are generally treated as taxable income to the recipient.269 Even when there is no time delay between the investment and the receipt of the income or change in union membership over time, if investment income is distributed as taxable strike fund income, there is no potential deduction for the payment of membership dues even in theory. The funds are distributed for consumption and taxed as such. Moreover, it is difficult to ignore the 2% floor in the context of lobbying and politicking when unions' exception from the section 6033(e) notification and proxy tax requirement is premised on the effect of the 2% floor.270

Thus, it is particularly difficult to characterize the exemption from tax for the investment income of unions. Although it can be viewed as providing rough justice for denial of the deduction for dues under the 2% floor of section 67, exemption existed long before the 2% floor. We can do as Halperin suggests: ignore the 2% floor as an anomaly and assume that investment income is used for purposes that would be deductible to the members. If so, exemption of investment income gives that income the benefit of deferral. We could also accept the 2% floor and treat dues as nondeductible, but assume as well that a large proportion of investment income is received by members in the form of taxable strike fund distributions at some later date. In this case as well, the investment income of the strike funds would receive a tax benefit from deferral.271 Whatever characterization we choose, the match is less good in the case of labor unions.

If we accept taxation of investment income as an indirect way of eliminating the benefit of deferral, the decision not to tax the investment income can be seen as a subsidy for section 501(c)(5) and (c)(6) organizations, as can exemption from tax on the retained earnings on section 501(c)(4) organizations. Courts, moreover, are less likely to be concerned about theories of proper measurement of income and more likely to take a simpler approach, one like that expressed in TWR: Taxable corporations are subject to tax on any retained earnings, including any investment income. Exemption of such income from tax enjoyed by section 501(c)(4), (c)(5), and (c)(6) organizations is likely to be viewed as a subsidy for purposes of constitutional analysis, even if not for purposes of tax theory.272 Recall Justice Douglas's concurrence in Cammarano—for constitutional purposes, a deduction for lobbying expenses did not define business income, but provided a subsidy for lobbying.

Under such an approach, the structure of our tax laws regarding politicking might nonetheless pose a constitutional conundrum. Under section 527(f), to the extent these organizations engage in politicking, they are taxed on the lesser of amount spent on politicking or their net investment income. While intended to treat these organizations in the same way as section 527 organizations, the impact of the provision falls on those noncharitable 501(c) organizations with a significant amount of investment income, such as unions with large strike funds. A noncharitable section 501(c) organization without investment income can engage in politicking without incurring any tax under section 527(f). But such an organization with a significant amount of investment income will be taxed on that investment income up to the amount spent on politicking. Thus, section 527(f) can be seen either as directly taxing the exercise of First Amendment rights or ending the organization's subsidy to the extent it exercises its First Amendment rights. Either characterization seems constitutionally suspect. Without the subsidy, the protection of TWR for limits on First Amendment activity is lost. One law firm has in fact suggested that the section 527(f) tax is vulnerable after Citizens United.273 On the other hand, not to impose the section 527(f) tax could put such organizations in a better position than section 527 organizations themselves and violate the policy that expenditures for politicking come out of after-tax money.

If we focus on Justice Blackmun's concurrence in TWR, these organizations have available a tax-free alternative of establishing a separate segregated fund (SSF) under section 527(f) that will have little or no taxable investment income—certainly not investment income equal to every dollar spent for politicking. Such a tax-exempt or nearly tax-exempt alternate channel would seem to suffice under the TWR concurrence. As described in the next section, however, it raises additional questions under Citizens United.

C. The validity and the burden of the alternate channel after Citizens United

As discussed earlier, Citizens United asserted both that a PAC, as a separate association, could not speak for its affiliated corporation and that, even if it could, the burdens of establishing and maintaining a PAC themselves pose First Amendment shortcomings.274 Thus, we must ask whether the same conclusions hold for a SSF, established by a noncharitable tax exempt organization, that functions as a section 527 organization.275 Can this affiliated SSF speak for the section 501(c) organization under Citizens United or does Citizens United require the conclusion that maintaining the SSF is too great a burden under TWR? For the description of the burdens of operating a PAC under the campaign finance laws, Citizens United quoted from Massachusetts Citizens for Life (MCFL),276 and the case helps to answer these questions.

MCFL involved some of the provisions at issue in Citizens United, in particular the provisions in the Federal Election Campaign Act prohibiting corporations from using treasury funds to expressly advocate for candidates in a federal election and requiring that any expenditures for such purpose be financed by voluntary contributions to a separate segregated fund. The Court in MCFL held that the provision could not apply constitutionally to an organization, such as MCFL, that 1) is formed for the express purpose of promoting political ideas and prohibited from engaging in business activities; 2) has no shareholders or others with a claim to its assets or earnings; and 3) was not established by a business corporation or labor union and does not accept contributions from such entities.277 According to the MCFL Court, the concerns that prompted the statutory prohibition, such as potential for corruption and protecting minority interests, were not present in regard to such organizations.278

Nonetheless, for the MCFL Court, the practical effect of the burden of speaking through a PAC even if organized as no more than a SSF, made “engaging in protected speech a severely demanding task.”279 The government in MCFL invoked TWR to argue that the requirement that independent spending be conducted through a SSF did not burden MCFL's First Amendment rights.280 The Court's opinion in MCFL rejected the government's argument and distinguished TWR.281 A result such as the one in TWR, it explained, “would infringe no protected activity, for there is no right to have speech subsidized by the Government. By contrast, the activity that may be discouraged in this case, independent spending, is core political speech under the First Amendment.”282

Thus, if we accept exemption of investment income from taxation as a subsidy, the alternate channel of a SSF under section 527 for noncharitable 501(c) organizations continues to pass muster after Citizens United because of Citizens United's endorsement of MCFL and because MCFL, which expressed First Amendment concerns like those in Citizens United, in turn confirmed the continuing viability of TWR.283

Similarly, the reporting scheme that section 527 requires of the SSF and other section 527 organizations probably does not pose so great a burden as to invalidate the affiliate structure under TWR. For the TWR burden analysis of the affiliate structure, the standards in the Court's TWR opinion are more difficult to satisfy than those of the TWR concurrence. Justice Blackmun in his TWR concurrence worried about control of the alternate channel; nothing in section 527(f) limits control of the SSF by the section 501(c) that establishes it.284 The Court's opinion in TWR discussed the purpose and burden of recordkeeping requirements needed to show that no tax deductible contributions supported lobbying.285 The disclosure and recordkeeping required under section 527 do not relate directly to the subsidy of deduction, as in TWR.286 But they do relate to the purpose of the section 527 exemption. The 2000 amendments to section 527 were designed to link exemption to disclosure, to satisfy a perceived need of the public for information related to political speech. Thus, the match between burden and purpose in section 527 as amended satisfies TWR.

TWR alone, however, may not resolve the question of whether the burden of section 527 is a permissible burden. Language in MCFL and Citizens United itself is helpful as to whether the burden of the recordkeeping and disclosure under section 527 is undue. When the government in MCFL expressed concern that ending the prohibition regarding use of treasury funds by MCFL “would open the door to massive undisclosed political spending by similar entities and to their use as conduits for undisclosed spending by business corporations and unions,”287 the Court plurality saw no such danger because of another set of disclosure provisions in the campaign finance laws applicable to contributors who provide an aggregate of $200 in funds intended to influence elections and recipients of independent spending amounting to more than $200.288 According to the Court, “The state interest in disclosure therefore can be met in a manner less restrictive than imposing the full panoply of regulation that accompany status as a political action committee under the [Federal Election Campaign] Act.”289 Similarly, it was the “full panoply of regulations that accompany status as a political action committee” that Citizens United described as so burdensome. Citizens United upheld less onerous and detailed disclosure requirements regarding contributors 8–1 against constitutional challenge.290

The disclosures required under section 527(j) parallel the less onerous of the campaign finance law disclosure regimes described in MCFL.291 It is only the more onerous regime that campaign finance law applies to political action committees that Citizens United scorned. Thus, it would seem that the burden of the section 527(j) disclosure would similarly not violate First Amendment rights, and the rational relation test is the appropriate test to apply in judging the validity of section 527(j). A SSF, however, is treated as a political organization under section 527.292 Thus, in order to gauge fully the burden of the required disclosures under section 527(j) and the penalties applied for failure to make the required disclosures, we must determine how we view section 527 itself, and it is to that subject the article now turns.

D. Citizens United and the 2000 amendments to section 527

The assertions in Citizens United that “[n]o sufficient governmental interest justifies limits on the political speech of nonprofit or for-profit corporations” and that “PACs are burdensome alternatives”293 also call upon us to reconsider section 527 itself. Section 527 is not easy to characterize. Congress saw the 2000 amendments to section 527 as campaign finance reform but relied on TWR for their being constitutional as part of a tax subsidy.294 That is, to satisfy the TWR analysis, Congress sought to structure section 527 so that organizations subject to the burden of the new registration and disclosure provisions, with the substantial additional tax for failure to comply with disclosure requirement, would choose to be exempt under section 527 on the basis of the offered tax subsidies. The Eleventh Circuit in Mobile Republican Assembly v. United States viewed the statutory scheme as voluntary in this way—only by accepting these burdens would political organizations enjoy income tax exemption on their exempt function income.295 The IRS has also indicated that if an organization meeting the definition of a political organization in section 527(e)(1) fails to file the registration notice, its taxable income will include exempt function income pursuant to section 527(i)(4).296 That is, according to these authorities, status as a political organization is not voluntary, but after the 2000 amendments to section 527, status as a tax-exempt political organization is voluntary. They take this position despite the statement in section 527(a) that “[a] political organization shall be considered exempt from income taxes for the purposes of any law which refers to organizations exempt from income taxes.”

A number of scholars disagree with treating tax-exempt status as voluntary.297 Roger Colinvaux believes that while it is unclear whether the historical basis for excluding the income of political organizations is a gift theory or a conduit theory,298 section 527 as enacted in 1975 did no more than clarify and codify the result that “generally inured at the time under applications of normal tax principles to political organizations by the IRS.”299 He suggests that the court in Mobile Republican Assembly reached its decision without sufficiently examining the scope of the subsidy section 527 provides. He reads the 2000 amendments to section 527 as giving political organizations a choice between filing a notice under section 527(i) and subjecting itself to the section 527 regime or not filing the notice and returning to the taxation under pre-1975 law. He reaches this result by pointing to the language of section 527(i)(4), which describes the effect of a failure to file the notice referred to in section 527(i)(1). Section 527(i)(4) provides: “In the case of an organization failing to meet the requirements of [section 527(i)(1)] for any period, the taxable income of such organization shall be computed by taking into account any exempt function income (and any deductions directly connection with the production of such income). … ” He suggests that either of two interpretations of this language “resuscitate” pre-1975 law for organizations that opt out of section 527 treatment.300 First, section 527(i)(4) is subordinate to section 527(i) and thus applies only to organizations that at some point file the section 527(i) notice, but not to organizations that never do so. Second, taking income into account, as section 527(i)(4) requires, does not mean that it will be taxed; it means only that it will be treated properly under applicable tax principles.

In evaluating section 527, Gregg Polsky relies on the principle that the federal income tax laws operate to ensure that funds used for politicking consist only of dollars that have already been taxed.301 Money contributed to 527 organizations has already been taxed; to tax it again upon contribution is to impose an extra layer of tax because the money has been pooled with money from others, a result he finds inconsistent with tax principles.302 To him, section 527(i), properly viewed, is not a condition attached to a subsidy but a penalty on disclosure. He also rejects the notion that status as section 527 organization is voluntary. “An organization either is or is not a political organization for tax purposes based strictly on its activities.”303

As often is the case, many of Colinvaux and Polsky's arguments follow from their choice of baseline.304 Rather than comparing organizations described in section 527(e) that do register to those that do not, they compare the treatment of such organizations in the presence and absence of any legislation. They argue that, in the absence of such legislation, organizations engaged primarily in politicking or taxable organizations engaged in politicking short of such activities being their primary purpose would not be subject to income tax on contributions, primarily on a conduit or pooling of income theory. They suggest that such contributions may also be free of gift tax.305 If such is the case, their argument continues, the burdens of the 2000 amendment to section 527 so exceed the benefits of exemption that they could represent an unconstitutional penalty.

It is never easy to determine the appropriate base line from which to make comparisons and on which to make tax policy arguments. Nonetheless, as discussed earlier,306 when courts do make decisions about the reach of congressional powers, arguments based on legislative decisions seem more likely to carry the day than arguments going to basic tax principles. Again, Cammarano may be the best illustration of a court's approach: What matters is the congressional decision of whether or not to allow a deduction, not whether the deduction, as a matter of theory defines income or is intended as subsidy to encourage charitable giving. Under such an approach, section 527 provides a subsidy, as Mobile Republican Assembly concluded, and thus it can impose limits and burdens. As discussed in the preceding section, the burdens do not appear undue.

Congress structured the campaign finance regulation embodied in section 527 as a tax law because the sponsors of the legislation believed the constitutional protection afforded by a TWR analysis was necessary. Today, in light of the statement in Citizens United that an important government interest supports disclosure provisions under exacting scrutiny even for speech that is not the functional equivalent of express advocacy,307 it may be that an elaborate justification on the basis of the TWR subsidy theory for the registration and disclosure requirements that sponsors of the amendments to section 527 thought necessary in 2000 (and which I have just undertaken) is no longer required. At the same time, the broad reach of section 527 with its uncertain definition of exempt function income and thus its impact on core political speech may mean that a subsidy argument remains important.308

In any case, Congress added sections 527(i) and (j) to the Code in 2000 without amending the rest of section 527, and the section lacks coherence. Questions remain in particular about how to reconcile the statement in section 527(a) that a political organization “shall be considered an organization exempt from tax” with the requirements of section 527(i) that the organization file a registration notice in order for exempt function revenue to be exempt from tax and about how to treat organizations that meet the definition of a political organization in section 527(e) but fail to register under section 527(i) or make the required reports under section 527(j).309 Thus, a restatement of the section and related provisions to eliminate current inconsistencies and uncertainties would be a worthy and welcome endeavor. Even without congressional clean-up of section 527, the IRS might consider issuing further guidance on interpretation of the 2000 amendment so section 527 in the form of regulations rather than revenue rulings in order to ensure the greatest possible deference in any judicial review.310 Thus, while Citizens United has not rendered invalid the structure of section 527 or its position in the Internal Revenue Code, amendment and restatement of the provision could remove many current difficulties with it.

A. Require notice of application for exemption within specified time period

Currently, section 508(a) requires that most organizations that seek recognition as tax-exempt under section 501(c) notify the IRS that they are applying for exemption and obtain a favorable determination of their exempt status.313 If a section 501(c)(3) organization files its application for exemption within 27 months from the end of the month in which it is organized and is granted exemption, it will meet the notice requirement and be exempt from its date of organization.314 In addition, if the 27-month deadline is met, contributions made from its date of organization will be treated as deductible.315

No similar requirement applies to section 501(c)(4), section 501(c)(5), or section 501(c)(6) organizations.316 Thus, whenever the application for exemption for such an entity is filed and approved, exemption is retroactive to its date of formation. Moreover, such organizations are not required to file an application for exemption. However, all organizations exempt under section 501(a) are, with limited exceptions, such as for churches or organizations other than private foundations with gross annual receipts normally not more than $25,000, required to file the annual information return, Form 990, under section 6033.317 If the Form 990 is filed for an organization when no Form 1024 application for exemption has been filed, the IRS Service Center experiences a bureaucratic quandary.318

Reasons besides easing the bureaucracy favor requiring at least section 501(c)(4) organizations to apply for exemption and receive a favorable determination in order to be treated as exempt. Section 501(c)(4) is close in its permitted purpose to section 501(c)(3), for which application is already required. For those section 501(c)(4) organizations that are formed in order to engage in substantial lobbying, the lobbying must be related to the organization's exempt purpose. Such purpose will be described in detail in the application for exemption, and only by comparing a Form 990 to the application can tax administrators, the public, or journalists consider whether an organization's activities are consistent with its exempt purpose.

Extending the requirement of applying for exemption beyond section 501(c)(3) charities does not seem problematic. Congress has already made application for exemption a requirement for some noncharitable section 501(c) organizations. Requiring organizations to apply for exemption seems well within the TWR holding of permissible conditions on the subsidy of exemption, assuming, as discussed earlier, that courts would see organizations choosing to be tax-exempt as voluntarily choosing a subsidy. Congress, of course, could enact such a requirement by statute. There is also a good argument that Treasury and the IRS could impose such a requirement by regulation or other guidance.319 Treasury regulations currently provide that “an organization claiming exemption under section 501(a) and described in any paragraph of section 501(c) (other than section 501(c)(1)) shall file the form of application prescribed by the Commissioner.”320 Such form could include a due date. In the case of other tax forms, such as Forms 1040 and 1120, the IRS and Treasury have set due dates when the applicable statute is silent on the issue.321

B. Create a new category for tax-exempt organizations engaged primarily in political activities

If, however, our concerns about exempt purpose and registration focus primarily on organizations that engage in lobbying and politicking intervention or claim to be engaged primarily in such activities, we could consider creating a new category of exempt organizations for those organizations that primarily do so322 and require only organizations that fall into this new category to apply for exemption.

A special category for organizations that primarily engage in these political activities seems appropriate given that these activities are core First Amendment speech. In the case of lobbying, Congress has not to date addressed such activity as an exempt activity, other than to limit it as an activity for section 501(c)(3) organizations. All the other authority regarding lobbying as appropriate for exempt organizations is administrative, not statutory. So important an issue merits congressional consideration.

Creating this new category of politically active exempt organizations would also help to cure the schizophrenia that currently infects section 501(c)(4). Today, under section 501(c)(4), organizations formed to promote social welfare that do not qualify under section 501(c)(3) because they do not benefit a broad enough charitable class323 inhabit the same space as organizations with the same exempt purposes as section 501(c)(3) organizations but which fall under section 501(c)(4) only because of their substantial lobbying activities. These two groups do not logically belong in the same category.

Any organization formed within such a new category would need to specify an exempt purpose, and lobbying activities, as under current law, would be required to carry out the exempt purpose. A stated exempt purpose is also necessary to apply the flow through notification or proxy tax as required for organizations formed under this new category to lobby on issues for trade associations or unions.

Admittedly, establishing such a new category for politically active exempt organizations would heighten the tension already identified regarding the different definitions of lobbying applicable under section 501(c)(3) and 162(e). If a class of exempt organizations were to be established based primarily on lobbying activities, a consistent definition of lobbying would take on added importance. A new tax-exempt category for such entities, however, would be especially useful for expanded disclosure requirements, as discussed in the next section.

C. Increase public disclosure of contributors to noncharitable exempt organizations

Currently, public disclosure is permitted under the tax law or annual information returns only for contributors to private foundations and to section 527 organizations.324 Legislation reported out of the Ways and Means Committee prior to the adoption of the 2000 amendments to section 527 would have required disclosure of contributors to section 501(c) organizations subject to section 527(f), at various levels, depending on whether the organization set up a special account to receive politicking contributions. 325 The recent DISCLOSE bill considered by Congress326 would have established a similar disclosure regime for noncharitable tax exempt organizations that make independent expenditures for express advocacy or electioneering communications. Neither bill became law. Given the strong sense of many in Congress of the importance of disclosure to an informed electorate and the language in Citizens United endorsing such disclosure, such efforts can be expected to be renewed and could at some point become law.

Congress, however, might also look to a simpler disclosure scheme, for example, by requiring public disclosure of Schedule B to the annual Form 990327 for all organizations that pay section 527(f) above a certain threshold. Section 501(c) organizations that set up a separate segregated fund as a section 527 organization must make disclosures of contributions and expenditures; arguably, organizations that engage in such activity directly should be subject to the same disclosure requirements.

As another option, Congress could choose to follow more closely the model of the private foundation disclosure. We require public disclosure of contributors to private foundations out of concern that this is subset of section 501(c)(3) organizations with their narrow base of contributors may serve only their contributors' narrow interests.328 We could do the same for noncharitable exempt organizations: develop a public support test applicable to each category and require public disclosure of contributors only for those organizations that do not meet the applicable public support test.

These suggestions could be also limited to the new category of politically active tax exempt organizations suggested above. That is, public disclosure of Schedule B could be required solely for this category of noncharitable tax exempt organizations, without any public support test, or a public support test could be developed only for this new category, and we could require public disclosure of Schedule B only for those politically active tax exempt organizations that do not meet this newly developed public support test.

If we limit this set of rules to this new category, we might consider additional and more frequent disclosures, including disclosure of expenditures or even an elaborate regime that resembles the section 527 regime. Such expanded disclosure for lobbying tax exempt organizations would seem to pass constitutional muster even if not tied to tax exemption. As this piece has often noted, the Court in Citizens United upheld disclosure and spoke approvingly of disclosure requirements for speech that was not express advocacy. Moreover, the Supreme Court in U.S. v. Harriss held that disclosure of lobbying information to legislators was constitutional.329 Citizens United spoke approvingly of Harriss: “[T]he Court has upheld registration and disclosure requirements on lobbyists, even though Congress has no power to ban lobbying itself.”330 While Harriss involved disclosure to lawmakers, a recent District of Columbia Circuit opinion rejected a challenge to a disclosure provision of the Honest Leadership and Open Government Act on the grounds that the government had a compelling interest in revealing to the public those who were behind the funding of lobbying activities.331

Of course, requiring expanded disclosure would entail the difficult task of a penalty structure for failure to elect exemption or failure to comply with required disclosure.332 Moreover, unless some kind of tax similar to that of section 527(f) is imposed, organizations may well take care to engage in political activities just short of meeting the primary purpose test developed for this new category.

Before enacting any such disclosure provisions, policymakers would need to confront the purpose of donor anonymity in the tax-exempt context. Is anonymity the norm in order to protect individuals from harassment? Do we value anonymity only instrumentally, because we think it encourages donations? Is donor anonymity tied to First Amendment rights of association? The answers to these questions would affect how broad a disclosure requirement is appropriate, particularly when it relates to core political speech.

D. Tax politicking conducted directly by noncharitable tax-exempt organizations whether or not they have investment income

Although Congress sought in the section 527(f) tax to put organizations that engage in politicking on an even playing field with section 527 organizations, such has not necessarily been its effect in practice. Section 527 organizations, although subject to tax on their investment income, can easily avoid having any significant amounts of taxable investment income, either because they are short-lived or because they choose tax-favored investments, such as municipal bonds. Some noncharitable tax exempt organizations, however, will have little in the way of investment income and others, such as section 501(c)(5) unions maintaining strike funds, could have large amounts of investment income. (Of course, noncharitable tax exempt organizations can and do establish new affiliates to engage in politicking and avoid section 527(f) tax.)

We might, however, also consider applying the section 527(f) tax to the politicking (i.e., exempt function activities under section 527) of any noncharitable exempt organization, whether or not it has any investment income. Such a tax would encourage these entities to channel their politicking activities into separate segregated funds subject to section 527 with its disclosure and reporting regime. It would fall directly on core First Amendment activities, but, as discussed earlier,333 the availability of the tax-free section 527 alternative of a separate segregated fund appears sufficient for constitutional purposes under TWR, so long as we treat exemption itself as a subsidy. Such a move, however, would contradict the currently policy of taxing income used for politicking once, but only once. It would also be difficult to impose on organizations that have no income.334

All of these suggestions are offered to prompt further discussion. A number of them could be combined in various permutations. Some ask for small changes, others greater ones, to how we approach lobbying and politicking under the tax laws. Our willingness to consider them depends on whether we view exemption itself as a subsidy, how we value disclosure, and whether we think changes to the tax laws, even if desirable, are politically feasible.