ACLU Letter to the IRS Expressing Concerns about Revenue Ruling 2004-6 with Regard to Political Speech and the Definition of What Is or Is Not an "Exempt Function"

Judy Kindell
T:EO:RA:G

RE: Comments on Revenue Ruling 2004-6

Dear Ms. Kindell:

We are writing to express our concern about Revenue Ruling 2004-6, and urge you to adopt a bright-line rule regarding what is and is not an ""exempt function"" within the meaning of §527(e)(2) of the Internal Revenue Code.[1]  

The Revenue Ruling which is to be issued today, explains how the IRS will determine what is and is not an exempt function.[2] While the ruling is clear regarding activities involving ""express advocacy,""[3] other situations are judged by the inherently vague ""facts and circumstances"" test.  Application of such a vague test offends basic notions of due process, enhances the risk of arbitrary and discriminatory enforcement, and most importantly, inhibits the exercise of First Amendment freedoms.

The Ruling will have a major impact on non-profit advocacy, particularly during the time after which a candidate has declared her intention to run for office. Once an individual expresses an intent to run for office, virtually any criticism of that individual's stand on public policy could become a taxable activity. As a result non-profit advocacy organizations will be less able to inform the public about the actions of an elected official - such organizations face the choice of speaking out and possibly being taxed, or remaining silent and avoiding the tax. For example, the ACLU has long championed fixes to the USA PATRIOT Act. If the ACLU runs advertisements in a Congressional district asking voters to contact a recalcitrant congressman and ask him to sponsor a bill that would fix problems with the Act, this may or may not be an ""exempt function,"" depending upon the ""facts and circumstances"" the IRS chooses to examine.

Determination of what is and is not an exempt function can have important tax consequences for advocacy organizations.  Vague laws and interpretations create traps for organizations because they are unsure, in the absence of a bright line, what conduct will constitute an exempt function. Rather than have advocacy organizations act at their peril, the law prefers reasonable notice of what conduct will give rise to legal consequences, so that the organization may act accordingly. Vagueness results in chilling of communications that may well NOT have tax consequences, simply because the cost to the organization of being wrong is too great. Vagueness encourages silence instead of robust debate.

Another reason a bright line test is preferred is that it avoids allegations of discriminatory and arbitrary enforcement.  One of the reasons vague laws are disfavored is that they impermissibly delegate basic policy matters to those who must enforce the law. ""If arbitrary and discriminatory enforcement is to be prevented, laws must provide explicit standards for those who apply them."" Grayned v. City of Rockford, 408 U.S. 104, 108 (1972). Whether or not the IRS actually engages in discriminatory enforcement actions, application of vague laws and interpretations invites such allegations.

The most important reason vague laws and interpretations are disfavored in the context of the First Amendment is that they operate to inhibit the exercise of those freedoms. ""Uncertain meanings inevitably lead citizens to 'steer far wider of the unlawful zone' . . .than if the boundaries of the forbidden areas were clearly marked.'"" Id., at 109. The bottom line is that IRS Revenue Ruling 2004-6 deals with political speech, one of the core areas of speech protected under the First Amendment. The uncertainty inherent in the ""facts and circumstances"" test will inevitably lead  organizations to avoid certain political speech because that speech may later be deemed an ""exempt function"" and thereby become taxable. 

Prior to passage of the Bipartisan Campaign Reform Act, the ""express advocacy"" rule provided the clear guidance that the Constitution requires in this sensitive area. Indeed, the ""express advocacy"" rule was adopted by the Supreme Court in Buckley v. Valeo, 424 U.S. 1 (1976) specifically to avoid the vagueness of then-18 U.S.C. §608(e)(1), which restricted expenditures ""relative to a clearly identified candidate."" 

McConnell v. FEC , 124 S.Ct. 619 (2003) approved a change in the definition of ""electioneering communications,"" but did not alter the fundamental constitutional rule that any regulation of core political speech must be clear and specific. To the contrary, the Court's holding in McConnell rested firmly on its conclusion that the statutory definition of ""electioneering communications"" that Congress adopted in the BCRA - namely, radio or TV ads referring to a clearly identified candidate for federal office that are broadcast during a specified preelection period - established criteria that were ""both easily understood and objectively determinable."" 

Unfortunately, the ""facts and circumstances"" test embodied in Revenue Ruling 2004-6 is neither easily understood nor objectively determinable. Despite the illustrative examples contained in the Revenue Ruling, many advocacy organizations will be at a complete loss to determine in advance whether or not their speech will be taxable. Each must speak at its peril or remain silent. That result cannot be reconciled with the First Amendment. The question, in our mind, is how to resolve this critical constitutional flaw.

As an ""easily understood and objectively determinable"" alternative, we urge the IRS to use the ""express advocacy"" test as an appropriate means to determine whether or not a specific advertisement is an ""exempt activity."" That test has worked well and has been well-understood since its inception.

If the Service chooses to reject this recommendation, then we suggest that in addition to the ""express advocacy"" test, the factors listed in the Revenue Ruling as tending to show that the advocacy was NOT for an exempt function become safe-harbors. In other words, the presence of any one of those factors would be determinative that the advocacy was not for an exempt function. The benefit to this approach is that an organization will be able to determine in advance whether or not its advocacy is, in fact, an exempt function.  

Finally, we do have some questions that do not seem to be addressed in the Revenue Ruling:

1. What exactly does ""target[ing] voters in a particular election"" mean? For example, if the ACLU sent out an action alert to its members in a particular district, asking them to contact their elected representative, does the contact with that particular subset of the total possible ""voters"" in the election constitute targeting voters in a particular election for purposes of an exempt function? Elaboration of the term ""targeting"" may be helpful. 
2. Are communications to members of the advocacy organization considered an ""exempt function?"" For example, ACLU sometimes sponsors advertisements that would be available to everyone who sees the ad. On other occasions, ACLU merely sends information to its members. As a non-partisan organization, the ACLU does not advocate for the election or defeat of candidates. However, ACLU often exposes the positions of elected officials and of candidates on civil liberties issues. If such information is sent solely to ACLU members, does that qualify as an ""exempt function?""

We appreciate the opportunity to submit comments on IRS Revenue Ruling 2004-6, particularly since it has its greatest effect on political speech. Advocacy organizations must be able to not only engage in speech on topics of interest to those organizations, but be able to do so with some certainty regarding whether or not that speech constitutes an ""exempt function."" We believe our recommendations will foster greater public debate, while providing some certainty as to the tax consequences of engaging in that speech. The First Amendment demands no less.

Sincerely,

Laura W. Murphy
Director

Marvin J. Johnson
Legislative Counsel

 

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[1] An ""exempt function"" means the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed. 26 U.S.C. §527(e)(2). If a tax-exempt organization expends any amount during the taxable year directly (or through another organization) for an exempt function, then the organization will be taxed an amount equal to the lesser of either (1) the net investment income of the organization for the taxable year; or (2) the aggregate amount expended during the taxable year for such exempt function. 26 U.S.C. §527((f)(1).