[EL] Update on Freedom Path challenge to IRS's "facts and circumstances" test

[BZall at aol.com]

Here's a quick update on a pending case that's gone mostly under the radar, 
 but has the potential to be an earthquake in the ability of the IRS to 
regulate  political speech and association. Freedom Path v. Lois Lerner,  No. 
3:14-CV-1537-D (N.D.Tx). Note: I'm not part of the case, but I've been  
following it. 
 
In 2011, Freedom Path applied for tax-exemption as a 501(c)(4)  
organization, and was immediately ensnared in the IRS scandal. It filed suit in  
federal court in Dallas, and having survived motions to dismiss for mootness and  
standing, has now moved for partial summary judgment on its challenge to the 
 IRS's use of a "facts and circumstances" methodology to determine whether 
it is  engaged in political campaign intervention or, as Freedom Path 
claims, issue  advocacy. A copy of the Motion is attached. 
 
The IRS's "facts and circumstances" test has been applied for decades, and  
is basically a "know it when you see it" test that permits an individual 
IRS  employee to determine, based on all the facts and circumstances of a 
situation,  whether an organization is engaged in political or non-political 
activity (the  test is also used in a variety of other situations, usually not 
involving core  First Amendment rights). The IRS has never been able to 
articulate a simple  compliance test, and usually ends up offering multiple 
"examples" and repeating  the facts and circumstances test. In my training and 
classes, I suggest a "Three  T's" test: the IRS decision between political 
and issue advocacy depends on  a shifting set of three factors: Timing, 
Targeting and Text. How close to an  election? Was the advocacy directed to an 
electorate? Did the text deal with an  issue or with an individual, 
particularly an individual's character or fitness  for office? But there's always the 
facts and circumstances test under which  the IRS can make any choice it 
pleases, no matter the argument made by the  taxpayers. In other words, there's 
never any certainty about what the IRS will  do.  
 
The facts and circumstances test has been roundly criticized, including by  
the Bright Lines Project, which proposed replacing the test (except for 
about  ten percent of organizations) with "bright line" rules supposedly more 
easily  understood. After the IRS scandal, the IRS proposed new regulations 
defining  campaign-related political activity in ways similar to the Bright 
Lines  proposal, but after receiving hundreds of thousands of opposing public 
comments,  withdrew the proposal, and Congress has since barred the 
Treasury from  re-issuing the proposal. During the course of the IRS scandal and 
after,  Congress, outside groups, and the IRS and Treasury themselves 
repeatedly  described the facts and circumstances test as ambiguous, confusing and  
impossible for lay persons to understand and comply with. See, e.g., 
then-IRS  Commissioner Danny Werfel's Charting a Path Forward At The IRS, June  24, 
2013, P. 28. 
 
This case is the other shoe dropping. 
 
The legal theory behind the challenge, articulated, inter alia, by  Chris 
Gober of the Gober Group and Jason Torchinsky of Holtzman Vogel  Josefiak 
Torchinsky, is pretty simple: if the IRS itself has declared its own  rules 
ambiguous and too confusing for compliance, aren't those rules  
unconstitutional under the First Amendment's rights of speech and association?  After all, 
the Supreme Court laid down some clear and straightforward rules in  FEC v. 
Wisconsin Right to Life, 551 U.S. 449 (2007), essentially all of  which are 
violated by the facts and circumstances test, and the IRS's rules  violate 
the Supreme Court's ruling against the FEC's "two-part, twelve factor"  test 
for issue advocacy in Citizens United v. FEC, 558 U.S. 310 (2010). 
 
The traditional IRS defense is that the IRS is entitled to ignore the First 
 Amendment because it administers a "tax subsidy" and the Treasury must 
stand  apart from subsidizing political speech. Regan v. Taxation With  
Representation of Washington, 461 U.S. 540 (1983). But in recent years that  
defense has broken down, most famously in Z Street v. Koskinen, 791  F.3d 24 (D.C. 
Cir. 2015), where the IRS was accused of treating pro-Israel  groups 
differently. And in Agency for Int'l Development v. Alliance for Open  Society 
Int'l, 113 S.Ct. 2321, 2328 (2013), the Court limited the subsidy  argument to 
specific activities being paid for by government funds, and blocked  the 
argument for penalties against the entire organization. After all, political  
speech by exempt organizations is not subsidized, since it is taxed at the  
highest corporate rates under IRC section 527, meaning that 501(c)(4)s are 
the  worst examples of penalties against the entire organization for 
non-subsidized  speech. Moreover, with the relentless publicity about (and decisions  
against) the IRS targeting scandal, the IRS's claim of being a neutral 
broker of  tax rules has taken a beating. 
 
Even Paul Streckfus, editor of EO Tax Journal and famously  supportive of 
aggressive IRS enforcement of rules against political  intervention, wrote in 
today's EOTR: Freedom Path "may be right." I  would not want to be the 
IRS's defense counsel in the next four years. 
 
Barnaby  Zall
Law Office of Barnaby Zall
685 Spring St. #314
Friday Harbor WA  98250
360-378-6600
bzall at aol.com
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