Ninth Circuit Tees Up Latest Challenge to Citizens United and McCutcheon

Ninth Circuit Tees Up Latest Challenge to Citizens United and McCutcheon

Last night the U.S. Court of Appeals for the Ninth Circuit issued a divided opinion that sets up the next challenge to the Supreme Court’s decisions in Citizens United and McCutcheon. The Ninth Circuit panel in Lair v. Motl,  upheld Montana’s limits on campaign contributions to state officeholders, rejecting a constitutional challenge that the limits violated the First Amendment. Since Citizens United, the Supreme Court has  held that the Government’s only interest strong enough to overcome the First Amendment’s freedom to speak during political campaigns was preventing quid pro quo corruption. As the Court said in McCutcheon:

 In a series of cases over the past 40 years, we have spelled out how to draw the constitutional line between the permissible goal of avoiding corruption in the political process and the impermissible desire simply to limit political speech. We have said that government regulation may not target the general gratitude a candidate may feel toward those who support him or his allies, or the political access such support may afford. “Ingratiation and access . . . are not corruption.” Citizens United v. Federal Election Comm’n558 U. S. 310, 360 (2010). They embody a central feature of democracy–that constituents support candidates who share their beliefs and interests, and candidates who are elected can be expected to be responsive to those concerns.

Any regulation must instead target what we have called “quid pro quo” corruption or its appearance. See id.,at 359. That Latin phrase captures the notion of a direct exchange of an official act for money. See McCormickv. United States500 U. S. 257, 266 (1991). “The hallmark of corruption is the financial quid pro quo: dollars for political favors.” Federal Election Comm’n v. National Conservative Political Action Comm.470 U. S. 480, 497 (1985). Campaign finance restrictions that pursue other objectives, we have explained, impermissibly inject the Government “into the debate over who should govern.” Bennettsupra, at ___ (slip op., at 25). And those who govern should be the last people to help decide who should govern.

The key question in Lair was what evidence the Government needed to show that quid pro quo corruption was likely to occur; did they need to show that corruption had actually occurred, or that it was imminent, or just likely, or even just possible? The Lair majority said even less was required; to sustain a law governing campaign-related speech against a constitutional challenge, the Government need only show that quid pro quo corruption was just not “illusory,”  or not “implausible.” Slip op., 16. Don’t need actual evidence, just someone declaring in an affidavit that it might happen. Slip op., 17. In Lair, state legislators testified that PACs would make more campaign contributions “when certain special interests know an issue is coming up, because it gets results.” Slip Op., 18. That was enough to show quid pro quo corruption, the panel majority held.

Ninth Circuit Judge Carlos Bea dissented strongly, noting that Supreme Court decisions require more than just some hypothetical corruption threat, that there be some realistic quid pro quo corruption threat.  Slip Op., 37, 38, 41, 42 (Bea, J., dissenting). Judge Bea wrote:

The mere prevention of influence on legislators by contributors is now not a valid important state interest that could justify campaign contribution limits. Citizens United v. FEC, 558 U.S. 310, 359 (2010); see also McCutcheon, 134 S. Ct. at 1441. As such, only the avoidance of corruption or the appearance of corruption remain as a
state interest valid and important enough to limit the free speech rights of contributors exercised through their contributions to their legislators. … To establish this sole valid important state interest defendants here must demonstrate that the existence of actual or apparent quid pro quo corruption is more than “mere
conjecture” and is not “illusory.”

Slip Op. 36-37.

And Judge Bea’s dissent pointed out that all of the examples cited by the panel majority were rejected by the legislators to whom they were targeted. Slip Op., 38-41. Thus, Judge Bea argued, there was no actual threat of quid pro quo corruption, only fears that there might be from what the Supreme Court had repeatedly declared to be legitimate speech (or at least speech that the Court would not allow government to prohibit). Judge Bea concluded:

While it is admittedly difficult at times to distinguish between proscribed corruption and acceptable influence, given the important First Amendment interests at stake when restricting political speech we are obliged to scrutinize carefully whether a valid important state interest exists before upholding the constitutionality of such restrictions. See McCutcheon, 134 S. Ct. at 1451 (“The line between quid pro quo corruption and general influence may seem vague at times, but the distinction must be respected in order to safeguard basic First Amendment rights.”). Although there
is admittedly some common sense to the notion that limiting the amount of money citizens may contribute to political candidates inherently forestalls corruption, because so doing also restricts speech our federal constitution requires a greater
evidentiary showing than made on this record before a state may restrict political speech through campaign contribution limits.

Slip Op., 42-42.

The Lair case was filed by Jim Bopp, a legendary attorney whose cases have included many of those leading to current Supreme Court precedents in this area. Bopp vowed to appeal the Ninth Circuit decision. Bopp told the Associated Press that:

“I’m very disappointed that the majority is not willing to apply the changes in the law that Citizens United has mandated,” that “only quid pro quo corruption can justify contribution limits,” Bopp said Monday. Under this ruling, you can “have your constitutional rights stripped from you because somebody can imagine that someone might do something wrong with those rights.”

So yet another Bopp First Amendment case is teed up for the Supreme Court in coming months. This one may tie together threads left dangling in earlier cases:

  • do the newly-reinvigorated First Amendment protections for campaign expenditures now apply to campaign contributions as well? That would carry on the logic of McCutcheon, which, using the newer definitions of corruption, removed overall limits on some campaign-related expenditures.
  • do the First Amendment protections against limiting campaign expenditures on the basis of the identity of the spender (the real holding of Citizens United) apply to campaign contributions as well? Again, that would simply extend the logic of McCutcheon.
  • Can an “infusion” of campaign funds ever constitute quid pro quo corruption? Both McCutcheon and earlier cases held that they might. If so, where are the lines to be drawn between “legitimate” associational rights and corruption?

Stay tuned.

Breaking: Supreme Court Vacates Problematic Fourth Circuit Opinion Welcoming “Restraint” of Candidate Speech

Breaking: Supreme Court Vacates Problematic Fourth Circuit Opinion Welcoming “Restraint” of Candidate Speech

Oct. 10, 2017. In a one-page Order, the Supreme Court vacated the Fourth Circuit’s opinion in Trump v. Int’l Refugee Assistance Project, No. 16-1436, and sent the case back to the Fourth Circuit with instructions to dismiss as moot the challenge to Executive Order 13,780. The entire text of the Order reads:

     We granted certiorari in this case to resolve a challenge to “the temporary suspension of entry of aliens abroad under Section 2(c) of Executive Order No. 13,780.” Because that provision of the Order “expired by its own terms” on September 24, 2017, the appeal no longer presents a “live case or controversy.” Burke v. Barnes, 479 U. S. 361, 363 (1987). Following our established practice in such cases, the judgment is therefore vacated, and the case is remanded to the United States Court of Appeals for the Fourth Circuit with instructions to dismiss as moot the challenge to Executive Order No. 13,780. United States v. Munsingwear, Inc., 340 U. S. 36, 39 (1950). We express no view on the merits.
Justice Sotomayor dissents from the order vacating the judgment below and would dismiss the writ of certiorari as improvidently granted.

PPLI and the Center for Competitive Politics had filed “friend of the court” briefs in the Supreme Court in Trump v. Int’l Refugee Assistance Project, No. 16-1436. That case, commonly referred to as the “travel ban” cases, considered the President’s power to block certain aliens from entering the United States. The U.S. Court of Appeals for the Fourth Circuit had blocked the Executive Order that imposed the ban, but did so by referring to candidate Donald Trump’s campaign statements. Unfortunately, the Fourth Circuit said:

To the extent that our review chills campaign promises to condemn and exclude entire religious groups, we think that a welcome restraint.

Int’l Refugee Assistance Project, et al. v. Trump, et al., 857 F.3d 554, 600 (4th Cir. 2017), slip op. 68

This “welcome restraint” doctrine conflicts with settled Supreme Court decisions protecting free speech on the campaign trail. For example, in Republican Party of Minn. v. White, 536 U.S. 765, 781 (2002), the Court said “the notion that the special context of electioneering justifies an abridgment of the right to speak out on disputed issues sets our First Amendment jurisprudence on its head.” In Brown v. Hartlage, 456 U. S. 45, 60 (1982), the Court said “It is simply not the function of government to select which issues are worth discussing or debating in the course of a political campaign.”

The two PPLI/CCP briefs first asked the Court to review the case, by granting certiorari, then, without taking a position on the merits, asked the Court to protect the First Amendment rights of candidates and those who want to hear their true opinions, by “vacating” (eliminating) the troublesome Fourth Circuit opinion. For more on these briefs, see the Litigation pages.

In competing letter briefs filed last week, the parties argued over whether the case was moot. The Federal Department of Justice argued that the bans have expired, mooting the case, so the Fourth Circuit’s decision should be vacated. In response, the challengers argued that part of the ban continued so the case should not be mooted, and, in any case, the Court never should have granted certiorari, and so should have dismissed the writ of certiorari as “improvidently granted.” Justice Sotomayor agreed with the challengers, but the rest of the Court did not.

The reference to Munsingwear is significant. The Court often vacates on the basis of mootness without referring to that seminal case. Munsingwear says

The established practice of the Court in dealing with a civil case from a court in the federal system which has become moot while on its way here or pending our decision on the merits is to reverse or vacate the judgment below and remand with a direction to dismiss. [340 U.S. at 39] … As already indicated, it is commonly utilized in precisely this situation to prevent a judgment, unreviewable because of mootness, from spawning any legal consequences. [340 U.S. at 41]

The Supreme Court’s near-unanimous decision ends this portion of the case. Another challenge to the “travel ban” includes a ban on certain refugee admissions, and has not yet been vacated. Some observers predict that as soon as that ban expires, on October 24, the challenge to it will similarly be vacated as moot.

PPLI President Barnaby Zall said of the decision: “We would have preferred a strong statement from the Court reaffirming their traditional respect for vigorous and free campaign speech. But given the high tensions surrounding this case, it’s probably the best practical outcome for the Court to have simply removed the Fourth Circuit’s decision from the books and declared the case moot. That way, no respectable lawyer will cite the Fourth Circuit’s legal mistake to argue for suppressing free speech.”

New TIGTA Report on “Inappropriate” Criteria for Evaluating Exemption Applications

New TIGTA Report on “Inappropriate” Criteria for Evaluating Exemption Applications

The IRS auditors filed into the conference room, led by the computer expert clutching his explanation of how he would “image” the organization’s hard drives (this was many years ago, long before this became routine), followed by several agents who would manage and conduct the audit. I sat on the other side of the table, flanked by my lawyer colleagues, several accountants from a national firm and one very nervous organization official. It was really awkward, with the IRS people looking down and everywhere but at us. This wasn’t my first rodeo; previous audit defenses had been professional encounters,  intense but not personal. This, on the other hand, was downright weird.

After a round of introductions, the first words out of the lead IRS agent were “I want to assure you that the selection of this organization for audit was purely random, just by chance.”

OK, then. Except … we knew for a fact that this wasn’t true. This was an enormous, powerful organization, household name, which the then-sitting President routinely excoriated by name. And, we had several knowledgeable contacts who had confirmed that, while there was no direct Nixonian order to investigate, the White House staff had gotten the word to the right people and the audit began quickly thereafter. It was one of several such audits around that time.

Selective enforcement of the tax laws are not new, including in the area of tax-exempt organizations. News coverage of such enforcement blows up when they become public, then quickly subsides with the “other side” claiming similar past outrages. Earnest law professors and commentators opine that it really isn’t that bad because the IRS has to do its job of finding and punishing miscreants. Indeed, the process was so irksome to IRS staff that after one such incident in which I was mentioned, then-IRS EO Director Marcus Owens called me out of the blue one morning to berate me: “So Barnaby, did someone cut you off in traffic this morning? Do you want us to audit them?” (Rest easy, friends; I didn’t recommend anyone, in part because I took the Metro that morning, and knew he was just venting.)

A later, fruitless congressional investigation was notable for the single question that organizations complaining about unfair IRS audit selection were asked: “Please send the Committee all the information that indicates the IRS improperly selected your organization for audit.” Um, shouldn’t you ask the IRS that question?

So the Lois Lerner-driven investigation of the 2010-13 “Be On the Lookout” IRS scandal landed with explosive force. By planting a question with Celia Roady, a respected EO lawyer, at the May 2013 American Bar Association Exempt Organizations Committee meeting, Lerner tried to get out in front of the Treasury Inspector General for Tax Administration (TIGTA), which was about to issue a report damning her and her staff for using “inappropriate criteria” to evaluate applications for recognition of tax exemption.

Prof. Paul Caron has long cataloged the massive output involved in charges and countercharges in l’affaire Lerner. Litigation is still on-going for that disaster, but courts and Congress have long recognized the management and staff failures that torpedoed what had been a relatively swift and understandable process.

As the U.S. Court of Appeals for the Sixth Circuit recently said:

Among the most serious allegations a federal court can address are that an Executive agency has targeted citizens for mistreatment based on their political views. No citizen—Republican or Democrat, socialist or libertarian—should be targeted or even have to fear being targeted on those grounds. Yet those are the grounds on which the plaintiffs allege they were mistreated by the IRS here. The allegations are substantial: most are drawn from findings made by the Treasury Department’s own Inspector General for Tax Administration. Those findings include that the IRS used political criteria to round up applications for tax-exempt status filed by so-called tea-party groups; that the IRS often took four times as long to process tea-party applications as other applications; and that the IRS served tea-party applicants with crushing demands for what the Inspector General called “unnecessary information.”

Predictably, some believe that it’s not really a “scandal” because (take your pick) the President didn’t order it, liberal/progressive groups were also “targeted,” and most of the groups eventually got their approvals/recognition. And others believe the scandal was intentionally suppressed by White House and Dept. of Justice pressure.

Now a new TIGTA report has been issued. This is a very limited report, issued almost entirely in response to claims that the scandal wasn’t just targeted against conservative organizations. Major publications issued headlines: the Washington Post said:  “Liberal groups got IRS scrutiny, too, inspector general suggests.”

And the new report found exactly that. Some of the organizations the IRS scrutinized using “inappropriate” criteria included organizations with “Progressive” in their names, some affiliated with the organization formerly known as the Association of Community Organizations for Reform Now (ACORN), and other liberal-sounding names.

Note, however, that this is not news. The 2015 Senate Committee report noted that:

While most of the potentially political applications that the IRS set aside for
heightened scrutiny were Tea Party and conservative groups, the IRS also flagged
some left-leaning tax-exempt applicants for processing. In order to centralize
these cases for review and processing, names and descriptions of several
left-leaning groups were placed on the BOLO spreadsheet. Some left-leaning
applicants experienced lengthy processing delays and inappropriate and
burdensome requests for information.

In fact, the IRS itself knew this even before the scandal broke. Judy Kindell, a legend in the IRS’s EO office for her expertise on political campaign intervention (IRS-speak for political campaigning), wrote an e-mail to Lerner on July 18, 2012, saying that:

Of the 84 (c)(3) cases, slightly over half appear to be conservative-leaning groups based solely on the name. The remainder do not obviously lean to either side of the political spectrum.

Of the 199 (c)(4) cases,9 approximately ¾ appear to be conservative leaning, while fewer than 10 appear to be liberal/progressive leaning groups based solely on the name.

The Kindell e-mail is reprinted as Appendix IV to the new TIGTA report, on Page 102.

And the new report actually makes things worse for the hard-working media in crucial ways. For example, by expanding, without a full explanation, the scope of its inquiry beyond the specific period of the out-of-control Lerner office scandal, the TIGTA report conflates two very different types of IRS scrutiny.

Warning: technical language ahead.

Although the new report mentions both the IRS’s “Touch-and-Go” (TAG) and “Be On the Look Out” (BOLO) programs, it doesn’t explain the differences between the programs and how one shows the scandal while the other may not. What’s really sad is that the Washington Post’s former “fact-checker” Glenn Kessler sussed this out and published an easy-to-read “Explainer” only a few weeks after Lerner’s planted question sparked the first storm of analysis, but his work was quickly forgotten, including by TIGTA.

There is a difference between a BOLO list and a TAG list (“Touch and Go”). Touch and Go was a standard processing term in many highly-problematic areas. (Note: the Internal Revenue Manual is the internal description of standard procedures and can be relied on in certain tax or legal proceedings.) Real TAG analyses are generally reserved for abusive transactions (many of which involve exempt organizations) and have a very specific chain of command and authority, plus review. Potential terrorism issues, for example, are on TAG reviews. You can imagine the reviews those generate. “Compliance” project reviews are generally not worthy of the full TAG panoply. IRM

To the extent we even know what they are/were, BOLOs, on the other hand, were a new and unreported (and apparently badly supervised) version of TAG lists that raised many of these issues. Like TAGs, BOLOs use key words in the database to identify possible transactions, but the differences are in the structure, supervision, and probably the choice of terms as being recognized for a particular definition of what the problem is.

Here’s an example of the difference: One of the “conservative” groups mentioned in the new report is for “Border Patrol.” See, pp. 28-31 of the report. Only appeared on the TAG list, not the BOLOs. The reason why organizations dedicated to “Stopping illegal immigrant entry into the U.S.” were listed in 2005 for special scrutiny? Potential “abusive transaction” issues, involving claims by the organization’s current Board members that the former Director had submitted erroneous information to the IRS. Not the name or philosophy or positions at all.

Similarly, the next organization portrayed in the new TIGTA report is “CA Politics.” This is another listing from the TAG, of an organization involved with the 2004 inauguration of the California Lieutenant Governor. Most telling, the organization was reported by the California Franchise Tax Board, a government agency telling the IRS there was a problem with this organization. Not because of “Politics” in its name or its partisan character. Not on the BOLOs.

In other words, TAG reviews are what we expected the IRS to do if there had really been a problem; BOLOs are not. BOLOs are, for want of a better description, rogue TAGs, and no one wanted to grab that leash to bring them under control. THAT is the scandal; not that groups’ applications were scrutinized, but that the process was overwhelmingly one-sided and unrestrained.

There is no IRM entry for BOLO lists, nor will there be, since they were stopped years ago. The liberal groups were mostly on TAGs; the conservatives (and a few unlucky progressive exceptions) were on BOLOs.

So it’s a false equivalence to include them both without an explanation of the differences. It’s even worse to discuss them as though the TAGs were as bad as the BOLOs, as the new TIGTA report seems to do.

This has been a long explanation, but it still doesn’t cover most of what went wrong (and what was wrong) in the Lerner era. This was not a question of whether only conservative organizations were targeted; there’s really never been a question that liberal/progressive organizations were also investigated.

But the fact remains that a far larger number of conservative organizations were targeted under the lawless BOLO process. And the BOLOs were different from the TAGs. The media should not be conflating the two, nor should TIGTA.

New IRS Form 1024-A for new 501(c)(4)s

New IRS Form 1024-A for new 501(c)(4)s

Susan Leahy of Covington & Burling, in Washington, D.C., has obtained a copy of the IRS draft Form 1024-A, and confirmed that it is cleared for her to distribute it. Many thanks to Susan, an accomplished member of the First Tuesday Lunch Group and its ancient predecessor the Lunch Bunch, for overturning this rock.

Confusion abounds about this new form. It’s all the result of a misguided and poorly-drafted amendment to the Internal Revenue Code in 2015. Some background:

Social welfare advocacy groups, exempt from most federal taxation under IRC § 501(c)(4), have never had to file applications for exemption with the IRS; they receive “recognition” of their exemption by virtue of their non-profit organization under state law. That’s why the IRS Form 1024, which can be used by those organizations that want the IRS to recognize their status, is entitled an application for “recognition”. A new c4 could simply file its annual tax information returns – Form 990 – and go about its merry way (though the IRS would send it a letter saying, in essence, “we don’t see you in our files; please file a Form 1024”).

But the PATH Act of 2015 mixed things up. A quite convoluted and ill-drafted section created new IRC § 506, which doesn’t require a new 501(c)(4) to apply for exemption, but DOES require them to file a notice with the IRS that they intend to operate as a c4. An existing c4 that hasn’t filed Form 990s (and yes, they are out there), would have to file one of these notices to keep its c4 status. And that filing had to have been before June 2016. Fellow FTLG member Sally Wagenmaker, of Wagenmaker & Oberly in Chicago, had a nice post explaining all this. The notification is by filing IRS 8976.

The notification is expressly not a substitute for a Form 1024; a c4 can file a Form 8976 and not a Form 1024 and be fine. 501(c)(4) status does not require any positive action by the IRS other than an acknowledgement that a Form 8976 has been filed, if required. (Of course, many c4s file 1024s to satisfy donors who want to see something from the IRS that the organization is exempt.)

In other words, Form 1024 is still optional for a c4. But the Form 1024 does not say it’s optional, nor does it reference the IRC § 506 requirement that a c4 file a Form 8976 or a 990. And it does contain a lot of material that is irrelevant to 501(c)(4) status. In other words, this situation is a perfect storm of confusion and waste, almost guaranteed to cause problems.

In a similar situation, involving the requirement to file a 990 at least every three years, the IRS threw tremendous resources into contacting every tiny or obscure organization that might have been affected. There’s a special, user-friendly reinstatement process for organizations that just didn’t get the word.

Not so for the new Section 506. There was a lot in the tax press about it — or, at least some pieces like Sally’s. And the IRS did issue interim guidance in Notice 2016-09 explaining the situation, but not any reinstatement or assistance process.

Enter the Form 1024-A. A single sentence on P. 241 of the Joint Committee on Taxation’s report on the  PATH Act mentions that “It is intended that such a request for a determination be submitted on a new form (separate from Form 1024, which may continue to be used by certain other organizations) that clearly states that filing such a request is optional.” There is no explanation for why this new section is needed; no description of a problem or benefit. Just a flat new requirement. Apparently an attempt to bridge the divide between those who believe c4s are inherently evil (“dark money” because they don’t have to disclose their donors) and those who think they provide a useful means for Americans to exercise their First Amendment-protected freedom to associate. But we just don’t know. And the new Form is not helpful.

All we have so far is the draft Form, and not the instructions, which usually explain a lot. The purpose of the form, as suggested by the JCT report, is to provide an optional application form for c4s. The draft says right at the top (though in small letters): “A request for a determination under section 501(c)(4) is optional.”

And it does reference Section 506 and the Form 8976. Part VIII of the draft, on Page 4 right above the signature line, says:

Information Regarding Notification Requirement Under Section 506
Most organizations operating under section 501(c)(4) are required to notify the IRS that they are operating under section 501(c)(4) within 60 days of formation by filing Form 8976, Notice of Intent to Operate Under Section 501(c)(4). If an organization doesn’t submit a timely notification, a penalty will be assessed. Submission of Form 1024-A doesn’t satisfy the requirement to provide notice to the IRS. See instructions for additional information regarding the notification requirement.

But a lot of the material on the draft Form 1024-A is still burdensome, and is pretty much cut-and-pasted from the original Form 1024. Arguably most of the questions have to do with things that will make the IRS’s life easier by providing information about possibly troubling situations, like Excess Benefit Transactions with “substantial influence persons” prohibited under IRC § 4958.

But is there any reason why this form has to be any more complicated than the new 1023-EZ, with essentially self-certification? Is this intended to be only the 1024 plus some brief mentions of the Section 506 requirement and the optional nature of the Form? That would be bare compliance with the JCT report’s single sentence requesting an optional form, but it wouldn’t really reflect the burden involved (something some of us mentioned during consideration of the PATH Act).

So we’re going to have more confusion about c4 applications for recognition, lots of questions that need to be answered on the form, but not for any clear purpose, and more work for we few struggling tax-exempt organization lawyers who have to explain why yet another layer of useless regulation is layered on protected speech. “Yes, you have the right to associate and speak, but we’re going to fine you $20 a day for the privilege unless you give us this Form and possibly others.”

[Update: The IRS published a notice soliciting comments in the August 24, 2017, Federal Register, asking in particular for:

Comments are invited on:
(a) Whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility;

(b) the accuracy of the agency’s estimate of the burden of the collection of

(c) ways to enhance the quality, utility, and clarity of the information to be collected;

(d) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and

(e) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.

The comment period was to expire on October 23, 2017, but we’ve only now seen the draft Form. Will the IRS extend the comment period now that we see what they’re up to? Stay tuned.