“Regulating campaign speech is not easy. It’s not supposed to be.” Jeffrey Sutton, Sixth Circuit Court of Appeals, Winter v. Wolnitzek, (Aug. 24, 2016). Particularly when the speech is from a judicial election. Can a judge – or any candidate for a judicial office – say the same thing as a candidate for a non-judicial office? Maybe, maybe not. Williams-Yulee v. Fla. Bar, 135 S. Ct. 1656 (2015); Republican Party of Minn. v. White, 536 U.S. 765 (2002).

Which makes it interesting that the only current nominee for an open seat on a federal appeals bench is being attacked for getting it “wrong” in such a case. Would Amul R. Thapar, now a U.S. District Court judge in Kentucky, really “eviscerate what remains of the law limiting the influence of money on politics”, as Ian Millhauser says today in Think Progress.

Evidence? Thapar’s District Court decision in Winter v. Wolnitzek, 186 F.Supp.3d 673 (E.D. Ky, 2016) (earlier case: 56 F.Supp.3d 884 (E.D. Ky, 2014)), which Judge Sutton upheld in large part. Millhauser’s analysis is comically slanted and incoherent; he says, for example, that “much of” Thapar’s opinion “was reversed” by Sutton’s Sixth Circuit decision. But Sutton’s opinion itself begins:

The district court issued a thorough and thoughtful opinion, making
our job easier. It struck some of these provisions and upheld others. We agree with almost all of its reasoning and affirm almost all of its judgment.

Millhauser doubles down by adding: “Thapar’s logic is that speech is identical to spending for purposes of the First Amendment. But if that were true, individual contribution limits would be unconstitutional.” Well, … no, to both parts. What Thapar said was that both spending and speech are subject to First Amendment protection, and that’s certainly true. But they are different for purposes of analyzing restrictions as  the Supreme Court said in 2014:

The right to participate in democracy through political contributions is protected by the First Amendment, but that right is not absolute. Our cases have held that Congress may regulate campaign contributions to protect against corruption or the appearance of corruption. See, e.g., Buckley v. Valeo, 424 U. S. 1, 26–27 (1976) (per curiam). At the same time, we have made clear that Congress may not regulate contributions simply to reduce the amount of money in politics, or to restrict the political participation of some in order to enhance the relative influence of others.

McCutcheon v. FEC, 572 U.S. ___ (2014). Some people don’t like to recognize McCutcheon but it’s actually a fairly modern analysis of this question.

So let’s review: contributions are kind of like speech, but not exactly the same in the application. The potential for corruption is present with money, but much less for speech; that’s the real message. And you still can’t use speech or contribution restrictions for viewpoint discrimination or to stop some sources from speaking.

Like a lot of First Amendment law, it can’t (or shouldn’t) be easily boiled down to “corporations are people” or similar memes. A Prius is not a Maserati, even though both are cars. Otherwise, well-meaning analysts are mis-led. For example, the fact that some concerns affect speech and contributions differently – though both are First Amendment-protected communications – seems to have eluded Millhauser.

So, too, criticism that Thapar used “the wrong standard” to evaluate judges’ speech restrictions. People for the American Way, for example, said: “Judge Thapar ignored Supreme Court precedent and, without meaningful analysis, applied “strict scrutiny” (the highest level possible) to the contributions ban.” To its credit, PFAW not only mentioned McCutcheon, but quoted it. Their take was different though, citing McCutcheon for emphasizing a “lower, but still rigorous standard of review.”

So this “without meaningful analysis” criticism turns on the new “exacting scrutiny” standard for review of certain campaign finance restrictions. See, e.g., Buckley v. Valeo, 424 U.S. 1, 26-27 (1976). And what does McCutcheon say that standard is? The restriction may be constitutional “if the State demonstrates a sufficiently important interest and employs means closely drawn to avoid unnecessary abridgement of associational freedoms.”  134 S.Ct. at 1444.

Sigh. It’s another one of those Prius/Maserati issues as well, noted in the Sixth Circuit opinion: “While ‘[j]udicial candidates have a First Amendment right to speak in support of their campaigns,’ Williams-Yulee, 135 S. Ct. at 1673, they do not have an unlimited right to contribute money to someone else’s campaign.”  That’s what PFAW was looking at as “meaningful,” I guess.

But Thapar’s analysis was meaningful and precise; he did not cite McCutcheon, but he could have, since he actually worked through both parts of the McCutcheon test quoted above (though he took them in reverse order).  First, was there corruption or the appearance of corruption from the contribution? No, because the corruptive aspect (“preventing bias against litigants”) was the same whether the candidate simply said “I support the Democratic party” or contributed to the Democratic party. Second, the State (through its Judicial Conduct Commission) was asserting that it wanted to diminish the speech of particular parties through this restriction; and here, the word “party” is apt, since the Commission’s actual statement of its interest  was:  “Kentucky’s compelling interest in diminishing reliance on political parties in the election of judges”. So by its own admission, the State’s purpose was not to avoid corruption (restriction permitted), but to diminish the role of specific speakers (not permitted).

The Sixth Circuit did reverse Thapar on this point, but it did so by, in essence, pointing out that he applied the second McCutcheon test on the wrong party. The State wanted the parties’ silence, and was using the judges’ contributions as a tool for doing that. The Sixth Circuit said, pretty much succinctly refuting PFAW’s complaint:

Financial contributions, we realize, amount to speech. See Buckley v. Valeo, 424 U.S. 1, 17–18 (1976). But the alignment between speech and money makes a difference only with respect to Janus-faced regulations that tell judicial candidates to run for office but deny them the tools for doing so. That is not what this regulation does. A contribution of time, money, or reputation to a political organization or a candidate in a separate election, whether judicial or not, differs in kind and degree from a judicial candidate contributing the same to his own campaign. There is “a dividing line between” the speeches clause, “which impermissibly bars protected speech about the judge’s own campaign,” and the contributions clause, “which addresses a
judge’s entry into the political arena on behalf of his partisan comrades.” Siefert, 608 F.3d at 984. Kentucky, for this reason, allows judicial candidates to purchase tickets to political gatherings only if “he or she doesn’t create the impression that the purchase is not for the advancement of the judge or candidate but is solely a contribution to another candidate or political organization, which is prohibited.” Canon 5(A)(2), Cmt. The contributions clause narrowly serves the Commonwealth’s compelling interest in preventing the appearance that judicial candidates are no different from other elected officials when it comes to quid pro quo politics.

Also a meaningful and precise analysis. Just looking at different aspects of the same question. Oh, and starting out with a very specific statement that must drive Millhauser and PFAW up a wall: “Financial contributions, we realize, amount to speech.”

So why attack Thapar for what is, in fact, a pretty tough call? Oh, just politics. I have no personal knowledge about whether he is qualified for the Sixth Circuit and really have no opinion. But he sailed through his Judiciary Committee nomination.

But let’s not use the guy to make some sort of case that campaign finance challenges won’t get a decent hearing in his court panels or that “money is not speech.” Thapar seemed to the rest of the Sixth Circuit to have “issued a thorough and thoughtful opinion” in the one case his opponents have raised.

Engineering professional associations spend lots of money and time trying to get engineers to communicate better with the public. But now the Institute for Justice has taken up the cause of an engineer fined $500 for speaking about engineering and how the government got it wrong.

Oregon electrical engineer Mats Jarlstrom was irritated when his wife got a traffic ticket for running a red light, and even more so when he looked at the light-timing formula Oregon used for yellow lights. He tracked down the professor who formulated the equation for yellow light timing in 1959, who said that the formula had been mis-used in Jarlstrom’s case because she was turning, not going straight. Jarlstrom then began a three-year crusade to educate the public and public officials about how this mis-used formula “sets people up for tickets they can’t avoid.”

The Oregon State Board of Examiners for Engineering and Land Surveying investigated Jarlstrom’s efforts, and decided he wasn’t the right kind of engineer to opine about traffic signal timing. He was fined $500 because he engaged in “the unlicensed practice of engineering.”

So IJ sued on Jarlstrom’s behalf.

I think it’s Hamilton’s influence; not the Founder, but the musical Hamilton. In fact, I’m listening to the original Broadway cast hip-hop recording at the moment.

But what brought that to mind was a further escalation in the ES (elephant seal) combat I discussed yesterday. In today’s EO Tax Journal Bruce Hopkins, of the Bruce R. Hopkins Law Firm in St. Louis, Missouri, responds to Marv Friedlander’s objection to the thesis of his new book challenging the IRS’s authority to require governance questions on the annual Form 990 report most tax-exempt organizations must file.

Hopkins writes that he was “stunned” to read Friedlander’s comments. He first points to California Independent System Operation Corp. v. FERC, 372 F.3d 395 (D.C. Cir. 2004). At ¶ 26, the D.C. Circuit wrote:

Every state has statutes affecting corporate governance. Presumably the members of the federal and state commissions charged with securities and corporate regulation are chosen with an eye to their expertise in matters corporate. Certainly the legislative bodies have given them powers with a view to that subject matter. The same cannot be said of the legislative empowerment of FERC, nor presumably are its members chosen principally for their expertise in corporate structure.

Hopkins obviously believes the same is true of the IRS, even its Exempt Organizations Division.

But even more, Hopkins begins to sing: “Marv seems to advocate turning the book into a musical!  How did he know?  (This leaking in Washington has got to stop.)  This revelation has forced me to send you the text of the opening number in the screenplay being drafted.”

Um, Hamilton it is not.  Nor is it even apparently a “screenplay.” It is, however, Hopkins succinctly stating his case:

The IRS says that a poorly governed entity will violate the tax law and otherwise become unruly. For many decades, nonprofit governance was the singular province and concern of the states. Their corporation, trust registration, and charitable solicitation acts ruled nonprofits’ fates. Then, without warning, the IRS struck, announcing it was regulating governance in 2007.

The nonprofit community was aghast; only its lawyers were secretly in regulatory heaven. The IRS pushed its regulation agenda, with tax exemption for public charities on the line. It began dictating policies, dealing with conflicts of interest, whistle-blowing, avoidance of crime. Also document retention, expense reimbursement, joint venturing, gift acceptance, investing. It got to the point that nearly everything a charity did had to be in a policy, rigidly vesting.

The agency revamped the annual information return, asking over 30 governance questions. It drafted good governance policies, many so ridiculous they were abandoned and shunned. The worst part was the IRS ruling policy, wrongly predicated on the private benefit doctrine.

The view of the IRS became this: small boards and related boards are universally forbidden. No matter that state law permits one-individual boards; the IRS summarily preempted that. If the entity has a small board, maybe as “small” as five or seven, it can stick exemption in its hat. The IRS hates boards consisting of related parties, such as brother, sister, son, daughter, father, or mother. It despises nonprofit boards comprised of individuals who are married, particularly to each other.

 

 

The first thing I thought of when I read today’s EO Tax Journal (by the irrepressible Paul Streckfus) was two bull elephant seals fighting over turf. Growls, howls and the musky scent of combat hormones in the air. In one corner, the top Exempt Organizations guru, Bruce Hopkins, touting his new book, Ultra Vires: Why the IRS Lacks Jurisdiction and Authority to Regulate Nonprofit Governance. In the other, Marv Friedlander, outspoken former IRS Chief, EO Technical, shouting at Streckfus’ readers that Hopkins was wrong.

The topic? Questions on Form 990, the annual “tax” information return filed by most tax-exempt organizations. Now the 990 is like the weather; everyone complains about it, but nobody can do anything about it. It changes glacially, once in a blue moon, and then everyone complains about the changes in it.

So having two bull seals going at it, over questions on the 990 is … weirdly normal in our world.

But this one is deeper. Not the wording or the meaning of the 990 questions, but whether the IRS can ask them at all. Was the IRS “ultra vires,” or beyond its legal authority?

The questions (on P. 6, Part VI, Section B of the 990) are simple enough: does the organization have a conflict of interest policy? A whistleblower policy? Written document retention policy? A compensation reasonableness review process (presumably consistent with the IRS’s procedures to avoid taxable “excess benefit transactions” under IRC § 4958)? All good sound management policies. And therein lies the rub.

Marv Friedlander, in an all-too-rare display of candor for an IRS EO official, ‘fesses up that he was the “initial instigator behind the governance” questions. He says: “In bowling, if the form is right, the pins should drop. In exempt organizations, if procedures for safeguarding an organization are in place … the likelihood of compliance with tax law is increased.” In other words, the ends justify the means.

Hopkins (disclosure: I was co-counsel with Hopkins in some fairly-significant legal matters in the distant past) respectfully disagrees, in long form. His book demonstrates that the IRS “has a lengthy record of getting the underlying law wrong and imposing detrimental policies and practices on” tax-exempt organizations.

Friedlander actually agrees with some of this history; in today’s letter to EO Tax Journal, he relates an instance where he had to correct one of his IRS agents. The agent had repeatedly blasted an applicant for exemption with questions and demands for changes in the organization’s organizing documents — and then denied the application.

The grounds for denial? That the organization’s willingness to comply with the agent’s demands demonstrated that the organization was likely to violate IRS rules in the future!

Yikes! Shades of the Lois Lerner days.

To his credit, “I personally apologized to the organization,” Friedlander writes, noting that he eventually granted the exemption application. Bet that made the applicant feel all warm and fuzzy after spending time and money trying to comply with the agent’s repeated questions and demands.

Hopkins, however, goes on, in matters not addressed by Friedlander, that this is “federal mission creep” (my term, not Hopkins’) by the IRS. State law addresses nonprofit organizations; states have long been dominant in areas of corporate (or entity) regulation. Federal law addresses federal tax exemption. The new 990 questions are all in the area previously exclusively state-law governed. Exploring the nature of agency law, Supreme Court decisions such as the hotly-debated Chevron doctrine, and the development of the IRS’s imposition of governance and operational standards, Hopkins shows that the IRS has no authority to impose such rules on EOs.

The IRS admits, in the Form 990 heading for Part VI, Section B itself, that “This Section B requests information not required by the Internal Revenue Code.” The 990 instructions (on page 18) do say: “Whether a particular policy, procedure or practice should be adopted by an organization depends on the organization’s size, type and culture.” But the real effect — costs and time — will fall on those trying to do the right thing. Those who want to break the rules will likely do so anyway.

Friedlander says that this language demonstrates that the IRS governance questions are not prohibited commands, but only “good governance advice because states, outside watchdog groups, Senate and House committees, news media, and interested individuals also have roles in ensuring that governing boards properly assume their fiduciary responsibilities.” He cites to complaints about the United Way, televangelists, Synanon, and other organizations whose managements went seriously awry.

But the 990 instructions also say “Although federal law does not mandate particular  management structures, operational policies, or administrative practices, every organization is required to answer each question in Part VI. For example, all organizations must answer lines 11a and 11b, which ask about the organization’s process, if any, it uses to review Form 990, even though the governing body isn’t required by federal tax law to review Form 990.”

Pretty mandatory. We are going to make you say PUBLICLY whether you are using the IRS-mandated whistleblower policies, even though we can’t compell you to do so. We’ll leave that to other people. Just because we think it’s a good idea to have others criticize you, to keep you in line. In other words, regulating by fear?

And that’s not all. There is the new threat that the IRS will clamp down on organizations that are not using procedures and policies which aren’t “required by federal tax law.” Not subtle. And in operation today, since the IRS has started using “data-driven” selection for examinations from the 990 filings, which they openly admit includes the answers to these “not required by federal tax law” questions on the 990.

There is nothing wrong with the IRS reviewing organizations’ tax returns to see if they are violating the law. And nothing wrong with using data mining or other techniques to ferret out miscreants.

But all this “advice” costs a lot of money and time, especially for small organizations. It costs thousands of dollars a year for an organization to hire compensation specialists and lawyers to satisfy the ‘whistleblower’ and other requirements. That’s a policy choice, not a tax compliance issue. It is Congress and the states which should impose these requirements, as Hopkins clearly demonstrates in his new book.

And as another top practitioner just pointed out to me, “It’s not as if the IRS needs to go out and look for more things to do.”

Nor should it, since the mentality behind the “we can do this, so we will” push for the IRS to step beyond its jurisdiction and authority can justify ANYTHING in the name of avoiding violations of the law. The IRS is famous for nebulous “advice” and even more ambiguous “facts and circumstances” rules of law. Certainty is lacking in the vast majority of exempt organization law, where “facts and circumstances” justify traps for the unwary. Or even the wary.

So if the IRS wants to advise organizations on good management practices, let it do more of what it has been doing: explain things on its website, hold outreach sessions, and do all the things that other regulatory agencies do to help compliance.

But, of course, those normal and common steps would require the IRS to recognize that it imposes burdens, and it must justify those burdens by the benefits derived from them. And THAT is the real danger here: the IRS thinks all organizations are bad and must be restrained because a few, and only a few, have run amok. But THAT decision is the province of Congress and the states, not the IRS.