Feds: Want A Tax Deduction? Give Up Your First Amendment Rights

Feds: Want A Tax Deduction? Give Up Your First Amendment Rights

Oral Argument in Supreme Court on April 26

            Want a tax deduction, or tax exemption? The Solicitor General of the United States, the federal government’s top litigator at the Supreme Court, says the price of that “governmental subsidy” or “voluntary tax-benefit program” is giving up your First Amendment rights. A “bargain” for or “waiver” of your rights. But the claim is a hidden trap, removing an important Free Speech limit on government power.

            The federal government has been pushing that argument for sixty years; sometimes it won (Regan v. Taxation With Representation, 1983, limit on charities’ lobbying did not violate the First Amendment). But in recent years, the Supreme Court usually rejects the argument, as it did in 2013 (Agency for International Development v. Alliance for Open Society Int’l) (AOSI I), 2017 (Matal v. Tam), and 2020 (AID v. AOSI II). As Justice Alito pointed out in Matal v. Tam, a case asking if the First Amendment protects “offensive” trademarks, the Department of Justice has been trying to expand their theory into an all-encompassing governmental power to limit the First Amendment rights of anyone who gets a governmental benefit or participates in a governmental program: “a new doctrine that would apply to ‘government-program’ cases. For the most part, this argument simply merges our government-speech cases and the previously discussed subsidy cases in an attempt to construct a broader doctrine.”

            In other words, if you take a tax deduction or a governmental benefit, or participate in a government program that involves an outlay of tax dollars (even an “indirect” one such as not having to pay as much tax), you lose some of your First Amendment rights. Which would be a massive problem: almost all Americans take tax deductions, get governmental benefits or participate in governmental programs.

            Congress’s power to decide what is tax-exempt or -deductible is not unlimited: “the First Amendment supplies a limit on Congress’ ability to place conditions on the receipt of funds.” Rumsfeld v. Forum for Academic and Institutional Rights (2006). If every exemption, benefit or deduction becomes a “voluntary” waiver that negates the First Amendment, then there is effectively no First Amendment limit on Congress’s ability to fashion a creative governmental “benefit.” And the problem would be worse if Congress, as it often does, leaves the details to agency regulation, which could expand the “voluntary” waiver far beyond what Congress intended. So, if the Supreme Court ever accepts the Solicitor General’s “broader theory,” it would be an enormous expansion of governmental power under the Constitution’s Sixteenth Amendment (income tax) and Spending Clause (if government pays for it, it can control it).

            Yet this long, existential battle has mostly flown under the radar. They’re trying again in the “Schedule B” cases consolidated for Supreme Court oral argument on April 26: Americans for Prosperity Foundation v. Becerra, No. 19-251, and Thomas More Legal Center v. Becerra, No. 19-255. This freedom of association case involves a demand from the California Attorney General that charities wanting to operate or fundraise in California must surrender their major donor lists to him as the price, even though California does not use the strict donor privacy protections required under federal law (enacted following the Nixon-era “enemies list” scandals).

            Even though the parties and lower courts in these cases didn’t raise this “subsidy” or “waiver” theory, the Solicitor General, sometimes known as the “Tenth Justice,” promoted the theory in the official briefs of the United States. For example, last November, President Trump’s Solicitor General told the Supreme Court that “the disclosure of a group’s donors, when imposed as a condition of administering a voluntary governmental benefit program or similar administrative scheme, is not a compelled disclosure … That is particularly so when the disclosure relates to a voluntary tax-benefit program—in effect, a governmental subsidy. An organization seeking the subsidy is not, strictly speaking, compelled to disclose its donors, because it always can forgo the governmental benefit.” Brief of the United States, Nov. 24, 2020, P. 12.

            Then on March 1, 2021, President Biden’s Acting Solicitor General told the Court that: “a disclosure requirement imposed as a condition on a governmental subsidy does not raise the same First Amendment concerns as a requirement that compels disclosure as a regulatory measure.” Brief of the United States, March 1, 2021, Pp. 24-25. The Acting Solicitor General has requested the Court to allow her time during the April 26 oral argument to discuss her assertion.

            Even though it might seem like this fight against the First Amendment should be a loser for the federal government, this is a really deep and complicated legal question. Almost every time the Justices face the “subsidy” or “public benefit” argument, we get cries of pain from the Court. For example, Justice Alito wrote in Matal v. Tam: “These cases implicate a notoriously tricky question of constitutional law. We have held that the Government may not deny a benefit to a person on a basis that infringes his constitutionally protected … freedom of speech even if he has no entitlement to that benefit. But at the same time, government is not required to subsidize activities that it does not wish to promote.  Determining which of these principles applies in a particular case is not always self-evident.” 

            The question originally wasn’t so difficult, but quickly the specific question of whether the Treasury was required to “subsidize” lobbying came up. Ever since the passage of the Sixteenth Amendment, Congress has exempted at least some organizations from taxes. But in the Revenue Act of 1934, otherwise charitable organizations were barred from tax-exemption and deductibility if they engaged in lobbying, and that deductibility prohibition for lobbying was extended to for-profit entities in 1935. In Cammarano v. United States(1959), the Court said that the federal government didn’t have to subsidize lobbying by a family-owned beer distributor because Congress had said so directly and clearly.

            Then, in 1970, the Court decided Walz v. Tax Commission of the City of New York, which distinguished direct governmental support (subsidies, employment, grants or contracts) from tax exemption: “No one has ever suggested that tax exemption has converted libraries, art galleries, or hospitals into arms of the state or put employees ‘on the public payroll.’” Justice Brennan, concurring in Walz, was more descriptive:

“Tax exemptions and general subsidies, however, are qualitatively different. Though both provide economic assistance, they do so in fundamentally different ways. A subsidy involves the direct transfer of public monies to the subsidized enterprise, and uses resources exacted from taxpayers as a whole. An exemption, on the other hand, involves no such transfer. It assists the exempted enterprise only passively, by relieving a privately funded venture of the burden of paying taxes. … The exemption simply leaves untouched that which adherents of the organization bring into being and maintain.”

            There’s another reason the Court considers this a tricky area of constitutional law; it’s a self-inflicted wound, implicating questions about preserving prior precedents. In 1983, the Court returned to the lobbying prohibition on charities, but stumbled with some inartful language. In Regan v. Taxation With Representation, the Court said: “Both tax exemptions and tax deductibility are a form of subsidy that is administered through the tax system. A tax exemption has much 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.”    

            The language of the Regan opinions reflects that stumble and the resulting confusion. In Footnote 5, Chief Justice Rehnquist, for the Court, tried to clarify that it was not disagreeing with Justice Brennan’s concurrence in Walz: “In stating that exemptions and deductions, on the one hand, are like cash subsidies, on the other, we of course do not mean to assert that they are in all respects identical.” But many, including the Solicitor General, overlook the correction. They think exemptions = subsidies = unlimited waiver of rights; not “similar to,” but equal to.

            In addition, through Footnote 6 in the Court’s Regan opinion and a Justice Blackmun concurrence that has, over time, become the general rule, the Court added a new “not burdensome” restriction on Congressional power to limit speech through the subsidy theory: no speech restriction could be so burdensome that the organization could not function using “private” money. In 1984, in FCC v. League of Women Voters of California, just one year after Regan, the Court said that a public radio station that received less than 1% of its funding from federal appropriations could not be barred from using private funds “to make known its views on matters of public importance.” Free speech, despite the government 1% “subsidy.”

            Still, several seemingly-conflicting decisions came down, with some arguing that “Every tax exemption constitutes a subsidy that affects nonqualifying taxpayers, forcing them to bear its cost,” Texas Monthly, Inc. v. Bullock (1989), and others saying that “Although tax exemptions and subsidies serve similar ends, they differ in important and relevant respects, and our cases have recognized these distinctions.” Camps Newfound/Owatonna, Inc. v. Town of Harrison (1997). Gradually, however, the Court began to pull together a clearer explanation of the limits on Congress of the “subsidy” or “benefits” approach. In 2011, in Arizona Christian School Tuition Organization v. Winn, the Court rejected the assertion that indirect assistance through money that the government never collected should be considered equivalent to cash grants: “Respondents’ contrary position assumes that income should be treated as if it were government property even if it has not come into the tax collector’s hands. … Private bank accounts cannot be equated with the Arizona State Treasury.”

            Since Agency for International Development v. Alliance for Open Society International (ASOI I) came down in 2013, the modern Court has focused on Congressional power, as it had in the original cases on tax-exemption. “In the present context, the relevant distinction that has emerged from our cases is between conditions that define the limits of the government spending program—those that specify the activities Congress wants to subsidize—and conditions that seek to leverage funding to regulate speech outside the contours of the program itself. The line is hardly clear, in part because the definition of a particular program can always be manipulated to subsume the challenged condition.”

            The AOSI I Court returned to a 1991 analysis from Rust v. Sullivan to see whether the challenged condition applied to the funded or subsidized “project” under review (likely appropriate) or to the “recipient” (likely inappropriate because outside the contours of the program intended to be restricted). “We explained that Congress can, without offending the Constitution, selectively fund certain programs to address an issue of public concern, without funding alternative ways of addressing the same problem. … The challenged regulations were simply ‘designed to ensure that the limits of the federal program are observed,’ and ‘that public funds [are] spent for the purposes for which they were authorized.’” A grantee can continue to engage in protected conduct using private funding.

            As Justice Kavanaugh’s 2020 opinion for the Court in AOSI II pointed out, the Regan option to speak through an affiliate was “rejected” in AOSI I because it “in essence would have compelled the American organizations to affiliate with other organizations.” Justice Breyer, in dissent in AOSI II, reinforced this rejection of part of Regan’s formula for constitutionality: “We further explained in AOSI I —and this is critical—why we could not accept the Government’s suggestion that the case was just a redux of Regan. In AOSI I, the Government suggested a similar ‘dual-structure’ solution to the First Amendment problem. Like the nonprofit in Regan, the Government noted, respondents could act (and speak) through two corporate entities. … True enough. But we rejected the Government’s argument all the same.”

            Add into the mix Justice Alito’s 2017 analysis in Matal v. Tam that:

“just about every government service requires the expenditure of government funds. This is true of services that benefit everyone, like police and fire protection, as well as services that are utilized by only some, e.g., the adjudication of private lawsuits and the use of public parks and highways.”

In other words, the Supreme Court noticed how far the Solicitor General’s theory could stretch to swallow First Amendment rights.

            In that light, the Solicitor Generals’ straight-faced assertions that there is some powerful governmental power to strip away First Amendment rights as a “bargain” or “waiver” in exchange for tax-exemption or deductions seem thin. Even California, which had several opportunities to plead the subsidy theory to support its desire to vacuum up the donor lists of every charity that wanted to do business in California, didn’t argue that in the end.

            It seems the days are over in which a government could simply utter “Regan” and hope to gain unlimited leverage over speech using tax exemption or deductions. Now both California and Congress still have to justify these decisions under the First Amendment as within their power and as tailored to the circumstances. And that is a win for the First Amendment’s inherent limits on government.

            But this quiet battle for the heart of the First Amendment, waged at least three times in the last decade, may yet continue. We will have to see what the Supreme Court says in response to the Solicitor Generals’ theory in the Schedule B cases this Term for the latest installment.

PPLI and National Taxpayers Union Foundation file Friend of the Court brief asking U.S. Supreme Court to protect privacy for donors to charities

PPLI and National Taxpayers Union Foundation file Friend of the Court brief asking U.S. Supreme Court to protect privacy for donors to charities

On February 26, 2021, the Public Policy Legal Institute and the National Taxpayers Union Foundation filed a friend of the court (amici curiae) brief in the consolidated cases of Americans for Prosperity Foundation v. Becerra, No. 19-251, and Thomas More Legal Center v. Becerra, No. 19-255. Both these cases involve demands by the California Attorney General for an obscure federal tax form listing major donors to charities. The two charities contend that the Attorney General’s demands violate the First Amendment rights of association; the Attorney General contends that he needs to collect the form from all charities that want to operate or fundraise in California in order to find and prosecute those who want to misuse the charities.

The PPLI/NTUF amici brief takes a different approach from most of the briefs filed in this case, which directly discuss the First Amendment issues and precedents. The new brief points out that this case is not just about the First Amendment, but also about the Sixteenth Amendment, which grants government very broad powers to collect income taxes, but must also respect taxpayer privacy. In other words, it’s not just the rights of donors, but also the need for government to protect the American tradition of voluntary tax compliance, which is the highest in the world. One of the reasons President Richard Nixon resigned was his misuse of the Internal Revenue Service; in the wake of Nixon’s “enemies list,” Congress passed strong privacy protections for taxpayers, including donors to charities. Ignoring those privacy protections undercuts taxpayer confidence.

The Attorney General’s plan to use charities’ donor lists to tilt at “dark money” windmills risks slaying the voluntary tax compliance goose that lays the golden eggs

The brief also addresses an over-reach in which the federal government argued that it could withhold First Amendment rights if a “public subsidy” was involved. In these cases, the Attorney General argued that it could require the charities to give up their donors’ names and addresses as a condition of being exempt from taxes. But that position is an overstatement of a long-standing line of “public subsidy” cases, with the most recent case handed down just last year. Only Congress, not the Attorney General, can pass a law requiring such a condition, and then only within specific limits. The “public subsidy” argument does not mean that charities must surrender all constitutional rights in order to get a tax subsidy, and the Attorney General’s demand for donor identification falls far short of the tests used to see if such conditions are constitutional.

The Attorney General should not be able to leverage an arguably legitimate use of Schedule B into a condition on an endless array of constitutional rights

The Summary of Argument from the PPLI/NTUF amici brief says:

These cases involve the First Amendment, but this is not just a First Amendment case. These cases are also, at heart, about taxpayer confidence, and its effect on government and society.

Respondent Attorney General of California, according to a letter dated December 9, 2019 and also signed by 19 other attorneys general, seeks to use charities’ donor information against “corporations, wealthy individuals, and special interests [who] seek to influence politics without leaving fingerprints.” The use of donor lists and other taxpayer information for non-tax purposes is the reason Congress enacted extensive tax privacy provisions after President Nixon’s misuse of the IRS. Ignoring the lessons taught by the federal experience could cause the revival of “enemies lists,” undercut the taxpayer confidence that underlies the world’s highest voluntary tax compliance rate, and reverse long-standing donor privacy rights.

Schedule B to IRS Form 990, the obscure tax form sought here, was never intended to be used to uncover wrongdoing; it was created in 2000 to protect donor information against leaks. It immediately failed, as it leaked again and “opposition researchers” discovered it as a rich source of donor information.

Nor is Schedule B useful for the purposes sought by the Attorney General, compared to the rich data available from Form 990. For twenty years, the IRS has tested Schedule B’s general questions against the more detailed and targeted information obtained on the publicly-available Form 990. The result is that the IRS no longer uses Schedule B. Nor do 47 states. Schedule B simply can’t be used, where Form 990 offers precisely what the IRS and the Attorney General seek. The IRS has been trying to get rid of Schedule B since 2016.

The same is true of any similar use of donor lists in the absence of the type of particularized evidence of wrongdoing the Form 990 was designed to uncover. To find wrongdoing, there are efficient and effective ways of identifying problem areas; Schedule B and other donor lists generally are neither efficient nor effective, especially compared to their propensity to leak. Advance mass collection of donor lists undermines taxpayer confidence that is essential to support government, especially if it is merely politicians tilting ineffectually at campaign finance windmills.

The contention in the amicus brief for the United States that “the disclosure of a group’s donors, when imposed as a condition of administering a voluntary governmental benefit program or similar administrative scheme, is not a compelled disclosure subject to exacting scrutiny or the narrow-tailoring requirement” is an overstatement and a misreading of this Court’s decisions. This Court has held that the condition may not be on the recipient as a whole, but only on a statutorily-defined program. The condition may not prohibit the recipient from conducting its activities using “private” money, and it may not be so burdensome that the organization cannot function. Language that suggests otherwise, such as in Regan v. Taxation With Representation, 461 U.S. 540 (1983), should be clarified. Among other things, this characterization ignores the special role of donor lists, the varied interests underpinning the tax system, and taxpayer confidence.

Finally, the lower court misunderstood how federal tax privacy protections operate and their effect. While the court below believed that the “risk of inadvertent disclosure of any Schedule B information in the future is small,” the Attorney General’s failure to provide even basic protections such as tracking and logging those who accessed the donor information means that the Attorney General wouldn’t even know when the protected information leaked.

This Court long ago established that the First Amendment bars the Attorney General here. The Court should reverse the decision below.

To see a copy of the amici brief, click here:

Can You Paint A Slogan On City Streets?

Can You Paint A Slogan On City Streets?

Last summer, street mural painting became a very big legal controversy. Can you paint a popular, but unofficial slogan on city streets? After all, huge “Black Lives Matter” slogans appeared on city streets across the country.

On February 18, 2021, Judge Lorna Schofield of the U.S. District Court for the Southern District of New York handed down a decision in Women for America First v. DeBlasio, which denied a request to paint a mural on a Brooklyn street conveying a different message (“Engaging, Inspiring and Empowering Women to Make a Difference!”) from a recent “Black Lives Matter” mural which had been painted by private citizens, but then “adopted” by New York City’s Mayor Bill DeBlasio. Judge Schofield said that, though the original BLM painters had been private, the Mayor’s adoption of the street painting (and expanding painting to all five boroughs) was an endorsement sufficient to convert the original mural into government speech. “The New York City government preserved the Murals and played a role in the creation of the six later murals.” Slip Op. 3.

But ordinarily, no. And the reason why is complicated, because sometimes the answer is yes. It matters whether you’re asking about sloganeering in the streets or on the streets. And it matters who is doing the painting: private citizens or the city. And it matters if the city adopts the painted slogan, even after the fact, as its own “government speech.”

As the Supreme Court noted in Waters v. Churchill (1994), when the government acts as a sovereign to regulate private speech, it has far less power than when it acts as employer or as speaker, both of which involve its own speech or at least the public perception that it is the government speaking. That is the point of the First Amendment. But the closer speech is to core governmental functions, the more power the government has to regulate it. The classic example of this “speech spectrum” is government employees’ speech: the more the employees’ speech looks like the government’s own speech, the greater the government’s ability to regulate. As the Supreme Court said in 1995 in Rosenberger v. Rector of Univ. of Virginia, “when the State is the speaker, it may make content-based choices.”

So, can anyone paint on a city street? No. Think “in” vs. “on” the street. Streets are traditionally open “public fora,” where speech in the street is expected and protected, as the Supreme Court noted in 2009’s Pleasant Grove City, Utah v. Summum decision. But, the surface of the street is not a public forum. Slick, bright paint on streets can cause accidents and confuse drivers. So, Judge Schofield pointed out, “New York City does not generally permit private citizens to paint on streets open to traffic.”

The plaintiffs contended that allowing the BLM mural to remain on the street turned the street from a non-public to a public forum. But converting a non-traditional forum into a public one requires an intentional act for that purpose. Walker v. Tex. Div., Sons of
Confederate Veterans, Inc.
(2015). New York City did not intentionally convert the street surface into a public forum for slogans. Government’s silence or even some limited disclosure is not enough to convert a forum into an open, public one. And a government adopting, paying for, or endorsing someone else’s speech as the government’s own speech does not convert the forum either (in fact, this type of First Amendment “forum analysis” does not apply to government speech in the first place).

So, do people have a right to force the government to speak their message? They do, but not by painting on public streets. They do it at the ballot box. As the Supreme Court said in Walker, “it is the democratic electoral process that first and foremost provides a check on government speech”, not the First Amendment.

Bottom line: you ordinarily don’t have a right to paint your slogan on the street. That’s for safety reasons. That said, you can paint on a street’s surface, if you can get your friendly government to adopt your slogan as its own. And you do that through the First Amendment’s rights of public policy advocacy, assembly and petition, or the ballot box, not by asking a court to force government speech.

Reviving the Nixon “Enemies List,” Using IRS Form 990, Schedule B

Reviving the Nixon “Enemies List,” Using IRS Form 990, Schedule B

Following discussions with participants in the First Tuesday Lunch Group, a bipartisan discussion group of public policy practitioners, we have revised The Curious History of Schedule B legal analysis published last week into a new one, called “Revising the Nixon ‘Enemies List,’ Using IRS Form 990, Schedule B.” The new analysis is longer and more detailed, with additional discussion of how useful and effective Schedule B to Form 990 actually is. In particular, we have added specific looks at arguments already presented in court by the California Attorney General as justification for demanding that any charity that wishes to operate or raise funds in California reveal its donors.

Some excerpts:

  • Schedule B is one of the simplest tax forms: a list of names, addresses and other details which could identify those who have given large amounts to charities. Schedule B’s content makes it one of the most highly-protected federal tax forms because donor information, “if in the hands of the IRS at all, should be categorically sheltered from disclosure.” The Attorney General does not comply with federal data security requirements and usage restrictions, and so can’t get Schedule B from the IRS; he must ask for it directly from the charity.
  • The charities are challenging the Attorney General’s demands as violating the First Amendment’s freedom of speech and association. They have shown that the Attorney General’s office has a long and sordid history of leaking tax information on the Internet, endangering their donors’ safety and livelihoods.
  • The Attorney General claims to need the Schedule B to enforce California’s laws against fraud and abuse of charitable status because it would be more “efficient.” But the Attorney General did not mention to the lower courts, and the parties did not raise, a December 9, 2019, letter that he and 19 other Attorneys General sent to the IRS commenting on proposed regulations on Schedule B. The Attorneys General Letter indicated that the Attorney General actually had knowledge of, and intentions to continue, use of Schedule B for purposes far different from the limited charitable law enforcement he told the courts was his sole purpose in obtaining the Schedule B forms.
  • Most prominent among those other purposes was to use Schedule B to fight against “dark money” organizations, which, by law, are not charities: “corporations, wealthy individuals, and special interests seek to influence politics without leaving fingerprints. … The revised donor reporting requirements that the IRS now proposes are certain to make federal and state review of this spending far more difficult if not impossible.”
  • In other words, the Attorneys General of several states wanted to use Schedule B as a new kind of “enemies list,” targeting those who, entirely lawfully, want to enjoy the confidentiality promised under federal tax law.
  • Schedule B was a well-intentioned, but ultimately unsuccessful attempt to protect donors from disclosure. A significant number of State Attorneys General have indicated that they view Schedule B not only as a source of taxpayer information that federal law protects from disclosure, but as “a powerful tool” to use as they choose, no matter what federal law forbids. This difference of opinion sets up a variety of constitutional clashes over rights of individuals, organizations, and States themselves, under the First (freedom of speech and association), Fourth (freedom from unreasonable searches and seizures) and Sixteenth (tax) Amendments.
  • Not all these clashes are present in the cases pending before the Supreme Court. The lower courts and the parties have limited their briefings to the First Amendment issue of whether the State can request donor lists knowing that they will inevitably injure donors. The charities’ evidence of harassment and injury is strong, but disputed by the California Attorney General and in the Ninth Circuit Court of Appeals decisions.
  • Like a movie monster rising from the grave, Schedule B is essentially obsolete and unwanted. It injures people and undermines taxpayer confidence that is essential to support government. It is not essential or efficient in regulating charities. It raises unnecessary constitutional questions. More efficient and targeted methods are already available than the upfront collection of thousands of charities’ donors’ information.
  • The Supreme Court should use long-established First Amendment interpretations to help protect charitable donors, the organizations that depend on them, and the interests of the federal tax system in voluntary compliance. Otherwise, “enemies lists” may not only be revived, but will multiply.

To read or download the full analysis, click here: