The House of Representatives and Senate are working quickly to enact tax reform legislation, some of which affects political and tax-exempt organizations. Quarles & Brady, from Chicago, has a nice chart showing the differences between the House and Senate bills on tax-exempt organizations.

[UPDATE: And Jones Day has an even better one: 1503238683_2_House-Senate Tax Bill Comparison Chart December 4 2017 with revenue scores. Thanks to Cathy Livingston.]

In brief, the House bill now contains many more provisions dealing with exempt organizations’ speech, while many of the exempt organizations-related provisions in the Senate bill were removed in the final deliberations, including the major revisions making Section 4958 “intermediate sanctions” provisions much more complicated and onerous.

Not mentioned in the Quarles chart is that Section 13602 of the Senate bill and Section 3803 of the House bill (the language of both versions is identical), subjecting compensation of over $1 million to an additional Section “4960,” described as a tax on excess tax-exempt organization executive compensation, also covers political organizations exempt from tax under Section 527. In other words, PACs and other organizations described under Section 527 are taxed if they pay compensation of more than $1 million.

One additional point  is section 3305 of the House bill and section 13308 of the Senate bill (the language of both versions is the same) which amends IRC § 162(e) to deny business deductions for lobbying expenditures to local government lobbying; state and federal lobbying has long been non-deductible, but local lobbying had previously been deductible under § 162(e)(2) and (7).

Remember Engineer challenges Oregon law prohibiting mathematical criticism without a license? The Oregonian notes that he faced off with the State again in court, and this time Oregon’s Attorney General, “admitted to violating his rights.”

For earlier coverage, please see:

What? Another post on an obscure tax form? Yup, just because it’s obscure doesn’t mean it isn’t important.

In addition to the substance of the proposed form and what it means (see far below), there’s a much bigger issue at work here:

Should the IRS issue rules designed to capture every possible problem or violation, at a cost of burdening speech by smaller organizations or those without good lawyers? Or should the IRS use modern techniques of computer modeling and analytics to focus on the problem areas and take some of the burdens off the little guys?

The IRS’s deadline for commenting on the proposed Form 1024-A, for organizations that want to get an official IRS determination letter on their section 501(c)(4) status is tomorrow. Other organizations, such as the American Bar Association’s Section on Taxation, have filed generally favorable comments.

PPLI’s Comments on Form 1024-A, in contrast, are generally quite negative about the Form, and more importantly, about the IRS’s approach to the whole issue of Congressional intent and actions responding to its recent processing of applications for exemption for advocacy and small organizations.

The ABA’s comments were prepared under the guidance of Beth Kingsley, my friend, colleague and co-founder of the First Tuesday Lunch Group discussion group. That means I’m generally favorably inclined to her way of seeing things, but we do have some different ways of seeing things, and those are reflected in the differing approaches to this proposed Form. The ABA’s comments (at footnote 6) cited PPLI’s earlier post, but said:

In preparing these comments we considered this suggestion but ultimately did not adopt it. Unlike section 501(c)(3) organizations, section 501(c)(4) organizations seeking tax-exempt status are free to self-declare their tax-exempt status and avoid the burdens of filing an application for recognition of that status. For those organizations that do desire a determination of their section 501(c)(4) status, it is appropriate for the Service to do a review sufficient to determine that the organization meets the requirements for exemption under section 501(c)(4).

Let’s compare the ABA’s comments and PPLI’s to see what this means:

The ABA says, for example, on Page 4 that: “Political campaign activities by section 501(c)(4) social welfare organizations have been the main source of controversy for such organizations in recent years, and are likely a key reason for the passage of section 501(c)(4)-related provisions in the PATH Act and, thus, the separate Form 1024-A application.” That is certainly a popular narrative, backed up by a 2016 letter by the New York State Bar Association asking for regulations on the new IRC section 506.

But it’s certainly different from the legislative history of Section 506 that I read. There was a move by Democrats on the House Ways & Means Committee to require section 501(c)(4) organizations to report whether they intended to engage in political activities, but that failed 11-20 in committee, and it didn’t even come up on the House floor. There’s also language in the Additional Views in the report on H.R. 1295, the bill that became Section 506 in the final PATH Act, about political activities, but nothing came of that.

Wasn’t even a partisan issue in the end. In those Additional Views, Sander Levin, Ranking Member of the Committee on that bill, said: “We support the improvements made by H.R. 1295 for section 501(c)(4) organizations applying to the Internal Revenue Service for tax exemption. However, we believe the bill can do more.” And when H.R. 1295 came to the floor, the Democratic floor manager, Rep. John Lewis, talked about the political activities of 501(c)(4)s, but still said: “I support the improvements the bill makes to the taxpayers’ exempt process for social welfare organizations. … The intent is to provide the agency with certain key information.” So the political activities fight, still going on at the moment, wasn’t actually part of the Section 506 fight in any meaningful way.

Actually the legislative history of the language that sparked the IRS to prepare Form 1024-A was pretty clear. The bill’s sponsor, Rep. George Holding, told the House: “this legislation before us would simplify the review process for the IRS and allow them to better focus their resources on the thousands – thousands, Mr. Speaker – of 501(c)(3) applications which are outstanding and languishing for review.” Rep. Peter Roskam, Chairman of the Oversight Subcommittee overseeing the IRS, said:

[The IRS has] said that they have spent 10,000 hours reviewing 4,000 applications for 501(c)(4) organizations, which sounds sort of interesting. …  that is 10,000 hours of a complete waste of time. That is 10,000 hours from an organization that is saying, Oh, we are just begging for mercy, and we are not able to meet these claims, and we are not able to make these calls. … But my point is this: Representative HOLDING’s concept says, this is a complete waste of time. Let’s clean this up. Let’s free up 10,000 hours so that we can do more with less and reject the IRS notion that the best that they can do is to do less with less.

So what Congress was telling the IRS was that it didn’t want the IRS to spend all that time on voluntary 1024s. Now this is a difficult message to accept for the IRS, and for lots of practitioners who see all the potential troubles that could (and do) come from a less rigorous 1024 application process. After all, why not stop the bad guys from the start? And there is certainly some truth to the IRS’s views on this, since they will likely get blamed if some miscreants go through the process and become public controversies.

But that’s not the world the IRS lives in today. Congress has said pretty clearly that it doesn’t want the IRS to spend its time on these applications. And the IRS’s job is to implement what Congress tells it to do.

Fortunately, the IRS is doing an increasingly-good job of leveraging its resources to minimize the burdens of “front-end” processing. Many people complain loudly about the Form 1023-EZ “self-declaring” application form, but the bottom line, the IRS officials tell us, is that they have to move the paper, and they are getting pretty good job of finding bad guys on the back side through reviews of the annual Form 990 tax returns.

And the point here is that someone has to be looking out for the interests of the little guys. There are probably a lot more tax-exempt organizations out there who cannot afford my legal services, or Beth’s or other law firms’ tax-exempt law specialists. In fact, a large part of any tax-exempt organization lawyer’s practice is picking up the messes when one of these non-represented organizations makes big mistakes.

The ABA’s approach of “it’s voluntary, so we don’t have to worry about the little guys,” simply means that only those who have experienced counsel can get the benefits of a determination letter, such as status retroactive to their creation, assurance for donors of status, and so on.

So why not try the less-burdensome approach? If it doesn’t work, then it will be easy to change tracks, with the evidence well in hand.

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’n, 558 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 States, 500 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.” Bennett, supra, 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.