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INTHEUNITEDSTATESDISTRICTCOURT
FORTHENORTHERNDISTRICTOFTEXAS
DALLASDIVISION
)
FREEDOMPATH,INC.
)
)
Plaintiff,
)
)
v.
)
CivilActionNo.3:14‐CV‐1537‐D
)
LOISLERNER,etal.
)
)
Defendants.
) )
FREEDOMPATH’SREPLYBRIEFINSUPPORTOFITSMOTIONFORPARTIAL
SUMMARYJUDGMENTFORCOUNTSVIANDVIII
Dated:November16,2016
Respectfullysubmitted,
OrrinL.HarrisonIII
[email protected]
GRUBERELRODJOHANSENHAILSHANKLLP
1445RossAvenue,Suite2500
Dallas,Texas75202
Telephone:(214)855‐6828
Facsimile:(214)855‐6808
JasonTorchinsky*
[email protected]
ShawnSheehy
[email protected]
HOLTZMANVOGELJOSEFIAK,TORCHINSKY,PLLC
45NorthHillDrive,Suite100
Warrenton,Virginia20186
Telephone:(540)341‐8808
Facsimile:(540)341‐8809
*Admittedprohac
By:_/s/ChrisK.Gober___________
ChrisK.Gober(LeadCounsel)
[email protected]
StephenM.Hoersting
[email protected]
THEGOBERGROUP P.O.Box341016
Austin,Texas78734
Telephone:(512)354‐1783
Facsimile:(877)437‐5755 ATTORNEYSFORFREEDOMPATH
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INTRODUCTION
The Government argues that the jeopardy for any group facing the “facts and
circumstances”testisneither(1)beingsubjectedtoanunconstitutionallyvagueprocessnor
(2)achillingofitsconstitutionally‐protectedspeech.SeeGov’tResponseBr.atpp.1‐2(ECF
No. 88, Page ID 2003‐04). But the Government is incorrect in both respects, and even a
cursory analysis of the “facts and circumstances” test reveals a regulatory test that is
unconstitutionalundertheFirstandFifthAmendmentstotheUnitedStatesConstitution.
Over the years, the Internal Revenue Service has made clear that social‐welfare
organizations, which are organized under § 501(c)(4) of the Internal Revenue Code, may
make political communications so long as those communications are not “the primary
purpose” of the organization. See 26 U.S.C. § 527(f)(1); Rev. Rul. 81‐95, 1981‐1 C.B. 332
(1981),availableat1981WL166125.Thosepoliticalcommunicationsarespeech,andthe
abilitytoengageinitisanenormousbenefittosocialwelfareorganizations.YetitistheIRS,
whichemploysanunconstitutionaltesttoanalyzetheseorganizations’activities,thatplays
gatekeeper for such speech. And because the “facts and circumstances” test of Revenue
Ruling2004‐6issovagueandoverlybroad,itallowstheIRS—whetherpurposefulornot—
toprovidethebenefitofspeechforgroupswhosepoliticalpersuasionstheIRSprefersand
todenyittogroupswhosepoliticalpersuasionstheIRSdislikes.
Agroupthatfallsonthewrongsideofthe“factsandcircumstances”testisnotjust
subjecttoataxastheGovernmentinfers.Gov’tResponseBr.at8(ECFNo.88,PageID2006).
Whiletheimpositionofataxcouldpotentiallyconstituteharm,thisisnottheproperwayto
analyzethemostharmfuljeopardylurkinginthe“factsandcircumstances”testhere.Rather,
to individuals operating a social‐welfare organization, the consequences of making
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communicationsthatfallonthewrongsideofthe“factsandcircumstances”testarethree‐
fold:(1)thepossibleannihilationofthesocial‐welfareorganizationitself,causedbyalossof
itstax‐exemptstatus;(2)thelesser,butnolessunconstitutionaljeopardy,ofbeingdeprived
of the funds necessary to make such communications; and/or (3) the possibility of being
subjecttocriminalorcivilfinesforfilingfalseorimpropertaxreturnsiftheIRSconcludes
thatcertainspeechshouldhavebeenreportedaspolitical.Theseconsequencesthreatenthe
social‐welfare organization for undisputed reasons, which the Government grudgingly
admitsandcannotdeny.
The first reason, stated in the Government’s words, is: “[T]he factors identified in
RevenueRuling2004‐6...playapartinhelpingtodeterminewhetheranorganizationhas
engaged in too much political campaign intervention activity to be entitled to tax‐exempt
statusundersection501(c)(4).”Gov’tResponseBr.at6(ECFNo.88,PageID2006)(emphasis
added).Inotherwords,resultsfromthe“factsandcircumstances”testcanallowtheIRSto
denyanorganizationits501(c)(4)status.Thesetoffactsthatcomprisethesecondreason
are:section501(c)(6)tradeassociations,501(c)(5)laborunions,andother(c)(4)schoose
whethertocontributetothespeechofa501(c)(4),likeFreedomPath,basedonwhetherthe
group’stax‐exemptstatusisingoodstanding.Forexample,firmsinthefinanceindustryand
manyoftheemployeeswhoworkforthemarestrictlyprohibitedorseverelylimitedintheir
abilitytodonatetopoliticalcampaigns,includingtoagrouptheIRSmaysoondeterminehas
a “primary purpose” of political activity. See 17 C.F.R. § 275 (Securities and Exchange
Commission Rules against political contributions by investment advisors); MSRB rule G‐
37(b);SECRegulatoryNotice16‐40.Therefore,iftheprocessforobtainingandmaintaining
501(c)(4)statusisvague,anagencymay,throughtheenforcementofthatvaguestandard,
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depriveanorganizationofneededfunds.Iftheprocessisoverbroad,rightstospeechand
association are necessarily chilled irrespective of any tax assessment or tax‐status
determinationthatmayalsoresultatalaterdate.Thisisthecentralissueinthiscase,but
theGovernmentmakesotherargumentstoobfuscatethemostrelevantharmsasserted.
TheGovernmentspendsalotoftimeinitsResponseBriefarguingthatthe“factsand
circumstances” test is a civil regulation, (ECF No. 88, Page ID 2011), that is sufficiently
objective(id.atPageID2010),thatitappliestobusinessactivity(id.atPageID2012),and
thatitdoesnotchillconstitutionallyprotectedspeech(id.atPageID2023).Tothecontrary,
FreedomPathhasdemonstratedthatthe“factsandcircumstances”testisnotobjective,that
social‐welfareorganizationsaremoredevotedtoadvocacythantobusinessactivities,and
thatadvocacyisaformofconstitutionallyprotectedspeech.SeePlaintiff’sMemoinSupport
of Partial MSJ (ECF No. 84). Any regulation of that advocacy utilizing a vague and overly
broad test is necessarily capricious under the Fifth Amendment to the United States
ConstitutionandnecessarilychillsspeechprotectedbytheFirstAmendment.
TheGovernmentalsoarguesthat,ifanorganizationhasanyconcernsaboutlosingits
tax‐exemptstatusorincurringatax,thenitcansimplyuseaseparatesegregatedfund(i.e.,
apoliticalactioncommitteeor“PAC”organizedunder§527oftheInternalRevenueCode).
Gov’tResponseBr.at15(ECFNo.88,PageID2017).Butsuchanargumentskirtstheentire
issueinthiscase:Whatistheproper,constitutionalprocessowedtoagrouporganizedunder
§ 501(c)(4)? The argument also obfuscates the fact that a separate segregated fund is a
separatelegalentity,distinctfromthecorporationitself.TheSupremeCourthaslongheld
that a PAC and its sponsoring organization are not the same entity. Austin v. Michigan
Chamber of Commerce, 494 U.S. 652 (1990) (Kennedy, J, dissenting); overruled on other
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groundsinCitizensUnitedv.FEC,558U.S.310(2010).Aseparatesegregatedfundmustfirst
beformedunder§527,maintainaseparatebankaccount,fileaseparatetaxreturn,andis
generally regulated by the Federal Election Commission and/or other state election
commissions(andthussubjectedtocontributionlimits,sourcerestrictions,andenhanced
reporting obligations not applicable to 501(c)(4)s). See 52 U.S.C. § 30101(4). In short,
establishing a separate segregated fund imposes administrative and financial burdens on
501(c)(4)s simply to exercise rights of free speech that the Constitution permits them to
exerciseintheirownright.
Finally, the Government notes that Freedom Path, or any other social‐welfare
organizationortax‐exemptapplicant,mayappealanyadversedeterminationtheIRSmay
makeinthefuture.Gov’tResponseBr.at10(ECFNo.88,PageID2012).Butanappealthat
adjudicates results created by an unconstitutional process—especially without the
opportunitytofirstchallengetheprocessitself,seeCatholicAnswers,Inc.v.UnitedStates,438
F. App’x 640 (9th Cir. 2011) (unpublished opinion) cert. denied 132 S. Ct. 1143 (2012);
ChristianCoal.ofFla.,Inc.v.UnitedStates,662F.3d1182,1196n.13(11thCir.2011)—is,in
fact,noremedyatall.SeeZStreetv.Koskinen,791F.3d24,31‐32(D.C.Cir.2015).
A.
ARGUMENT
The “Facts And Circumstances” Test Reaches And Chills Constitutionally
ProtectedSpeech
First,theGovernmentarguesthat“[s]ection527(f)[merely]createsparitybetween
section501(c)organizationsandsection527politicalorganizationsbytaxingsection501(c)
organizations‘totheextenttheyactuallyoperateaspoliticalorganizations.’”Gov’tResponse
Br.at4‐5(ECFNo.88,PageID2006‐07),quotingS.Rep.No.93‐1357(1974),availableat
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1974WL11700.Second,theGovernmentwantsthisCourttoknow“whatRevenueRuling
2004‐6doesnotdo.Itdoesnotban,restrain,orevenregulatespeech.”Gov’tResponseBr.at
7(ECFNo.88,PageID2009).Thefirstargumentmissesthepointofthiscase;thesecondis
incorrect.
While the terms of the “facts and circumstances” test do not expressly prohibit
speech,itiswell‐settledthatagroupwhoseprimarypurposeisorbecomes“exemptfunction
activity” (i.e., “political campaign intervention”) cannot attain nor maintain status as a
501(c)(4)organization.See26U.S.C.§527(f)(1);Rev.Rul.81‐95,1981‐1C.B.332(1981),
available at 1981 WL 166125 (holding that an organization that is primarily engaged in
activitiesthatsupportsocialwelfaremaybesubjecttotaxunder§527(f)ifitengagesin
political campaign intervention activities). As the Government admits, the “facts and
circumstances”test“describesdiscreteinstancesofpoliticalcampaigninterventionactivity,
which would be considered among all the group’s activities that do not promote social
welfare . . . in determining whether the group is operated primarily for social welfare
purposes.” Gov’t Response Br. at 11, n. 8 (ECF No. 88, Page ID 2013). In short, a group
weighing whether to air or publish a communication risks its very existence as a social‐
welfareorganizationunlessthecommunicationmeetsthethresholdlaidoutbytheIRS.Any
testregulatingspeechinthatcontextmustbeobjective:the“factsandcircumstances”testis
not.
Furthermore,groupssuchastradeassociations,laborunions,andother501(c)(4)s—
aswellasfirmsandindividualsinthefinancialindustry—areeitherprohibitedorfarless
likelytocontributefundstoanorganizationwhosecommunicationsappeartoplaceitonthe
wrongsideof501(c)(4)status.SeePlaintiff’sMemoinSupportofPartialMSJ,at19‐20(ECF
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No. 84, Page ID 1933‐34). Because potential donors may refrain from contributing to a
501(c)(4)basedonitsstatus,whichisdeterminedbythecommunicationsitmakes,anytest
policingthosecommunicationsmustbeobjective.Otherwise,speechischilled.
B.
The“FactsAndCircumstances”TestIsUnconstitutionallyVague
The Government asserts that Revenue Ruling 2004‐6 has not been applied to
FreedomPath.Gov’tResponseBr.at7(ECFNo.88,PageID2009).TheGovernmentmakes
thisargumenttocabinFreedomPath’sclaimasafacialchallenge,notachallengeas‐applied.
Id. Fair enough: the parties to this case did agree to stay the IRS’s use of the “facts and
circumstances” test to Freedom Path’s application for tax‐exempt status during the
pendencyofthiscase.SeeOrderGrantingPlaintiff’sMotionforPreliminaryInjunction(ECF
No.79,PageID1811).Nonetheless,FreedomPathdidhavethe“factsandcircumstances”
testappliedtotwoofitscommunicationsandtheresultdemonstrateswhythe“factsand
circumstances” test is “no standard at all, and makes the tax status of charitable
organizationsandtheirdonorsamatterofthewhimoftheIRS.”UnitedCancerCouncil,Inc.
v.CommissionerofInternalRevenue,165F.3d1173,1179(7thCir.1999).
TheIRS’sSeptember2013lettertoFreedomPathincludedasummaryofthe“facts
and circumstances” in the “LAW” section of their letter, which was then followed by an
“ANALYSIS” section that applied the “facts and circumstances” test to two television ads,
“Repeal It” and “Three Men,” that Freedom Path had aimed at the general public. 2d Am.
Compl.¶65(ECFNo.49‐1,PageID1170);AppendixtoGov’tBr.inSupportofMot.toDismiss
Plaintiff’s Second Am. Compl. (“MTD Appendix”) at 45‐54 (ECF No. 57, Page ID1549‐58).
WhileFreedomPathcontendsthatbothadsclearlymeetthestandardforissueadvocacy
undertheSupremeCourt’sopinionin FEC v. Wisconsin Right toLife,551U.S. 449(2007)
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(“WRTLII”),theIRS’sSeptember2013letterallegesthatthetwoadsarenotissueadvocacy
under§501(c)(4)butare,instead,“exemptfunctionactivity”under§527(e)(2)(i.e.,political
campaignintervention)andthus,subjecttotax.2dAm.Compl.¶¶107‐122(ECFNo.49‐1,
PageID1186‐92);MTDAppendixatp.52(ECFNo.57,PageID1556)(“Accordingly,based
onallofthefactsandcircumstances,weconcludethatthetwotelevisionadvertisementsand
three mailers that express approval for Candidate2 also constituted campaign
intervention.”).
TheGovernmentassertsthat“thevoid‐for‐vaguenessdoctrineprotectstwoessential
valuesofthedueprocessclause:fairnoticeandfairenforcement.”Gov’tResponseBr.at8.
(ECF No. 88, Page ID 2010). The first case it cites, however, undermines its argument:
“[B]ecauseweassumethatmanisfreetosteerbetweenlawfulandunlawfulconduct,we
insistthatlawsgivethepersonofordinaryintelligenceareasonableopportunitytoknow
whatisprohibited,sothathemayactaccordingly.”Graynedv.CityofRockford,408U.S.104,
108‐09(1972).The“factsandcircumstances”testfailsthisstandard.RevenueRuling2004‐
6 presents six factors “tend[ing] to show” that a given communication is campaign
interventionactivityandfivefactors“tend[ing]toshow”thatagivencommunicationisnot
campaigninterventionactivity,andnosinglefactorisdeterminativeorpredominates.Rev.
Rul. 2004‐6. The eleven factors are not weighted against each other, and the ruling
acknowledgesthatotherunspecifiedfactsandcircumstancesmaybeequallyrelevantbut
varying on a case‐by‐case basis. Id. In addition, the ruling presents six hypothetical
“situations.” Each situation lays out an isolated set of facts and states a result in those
circumstances,andthereislittlereasoningprovidedfortheresultbeyondarestatementof
theapplicablefactors.Id.Inpractice,theguidanceisoflimitedusetoFreedomPathandother
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501(c)(4) organizations who seek to operate in compliance with applicable rules and
regulations,andespeciallyforthosewhowanttodosowithconfidence.Indeed,theIRShas
notevenspecifiedtheamountofcampaigninterventionactivitiesallowedorclarifiedthe
waytheIRSmeasuresthequantityofanorganization’scampaigninterventionactivities.See
MarthaB.Lackritz,CommentsonProposedRegulationsShowExemptOrganization’sConcerns,
TaxationofExempts,at12,Sept./Oct.2014,citingMcPherson,EOTrainingMaterialsSuggest
51PercentThreshold,p.122(Pl’sApx.inSupportofMot.ToFileMots.ForPSJandforPI,Ex.
D,Apx.at17(ECFNo.75‐1,PageID1750‐62)).
C.
The“FactsAndCircumstances”TestIsUnconstitutionallyOverbroad
The Government argues that the “facts and circumstances” test is not
unconstitutionallyoverbroad.Gov’tResponseBr.at21(ECFNo.88,PageID2023).Tobetter
understand why this argument is incorrect, it is worth noting two constitutional tests
availabletoIRSthattheIRSisnotdeploying.TheIRSisnotdeployinganeasy‐to‐understand
testratifiedbytheSupremeCourtinmultiplespeechcases:thatagroupmayspendupto
49%ofitsresources“expresslyadvoca[ting]theelectionordefeat”ofaclearlyidentified
candidatetopublicofficeinacalendaryearandstillmaintainitsstatusasasocial‐welfare
organization, see Buckley v. Valeo, 424 U.S 1 (1976), or a test ratified as objective by the
Supreme Court in WRTL II: that a 501(c)(4) organization may spend up to 49% of its
resourcesincalendaryearonspeechthatisthe“functionalequivalentofexpressadvocacy.”
WRTLII,551U.S.at469‐70.
The“factsandcircumstances”testisunconstitutionallyoverbroadbecauseitsweeps
into“exemptfunctionactivity”speechthatisclearly“genuineissueadvocacy.”WRTLII,551
U.S.at469‐70.Themeansthroughwhichthetestsweepsgenuineissueadvocacyintothe
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categoryofexemptfunctionactivityisitsmulti‐factorformatthatincludes,butisnotlimited
to, eleven separate factors weighted as the trier of fact wishes them to be weighed. See
Plaintiff’sMemoinSupportofPartialMSJ,at9‐17(ECFNo.84,PageID1923‐31).
Specific factors identified in the “facts and circumstances” tests are also of
questionable validity. First, the Supreme Court has specifically held that the fact that a
communicationthatcoincideswithanelectoralcampaignorisdeliveredcloseintimetothe
electionisirrelevanttodeterminingwhetherthecommunicationisorisnotgenuineissue
advocacy.WRTLII,551U.S.at472.Second,thequestionofwhetheracommunicationispart
ofanongoingseriesofsubstantiallysimilarcommunicationsappearstofavorestablished,
single‐issueinterestgroups,whereastheexactsamecommunicationmadebyeitheranew
organizationorabroad‐basedadvocacyorganizationismorelikelytobetreatedas“political
campaign intervention.” The Supreme Court recently warned that “the Government may
commitaconstitutionalwrongwhenbylawitidentifiescertainpreferredspeakers.”Citizens
United, 558 U.S. at 340. Third, Revenue Ruling 2004‐6 asks whether a“communication is
targetedatvotersinaparticularelection.”Itisdifficulttodrawanyconclusionsabouthow
thisfactorisrelevantbasedontheIRS’streatmentofit.Inallsixexamples,theexpenditures
describedare“targetedtovoters”;however,inScenarios1,2,and5,theexpenditureisnot
deemedtobeforanexemptfunction,whileinScenarios3,4,and6theexpenditureisdeemed
tobeforanexemptfunction.Theseexamples,evenwhentakentogether,failtoindicatehow
the“targetedtovoters”factormattersonewayoranotherintheanalysis.
To the extent that the factors used by the IRS focus on contextual or external
considerations,asopposedtoobjectivelyexaminingthecommunicationwithinitsown“four
corners,”thosefactorsareconstitutionallysuspect.“[C]ontextualfactors...shouldseldom
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playasignificantroleintheinquiry.Courtsneednotignorebasicbackgroundinformation
thatmaybenecessarytoputanadincontext...buttheneedtoconsidersuchbackground
shouldnotbecomeanexcusefordiscoveryorbroaderinquiryofthesortwehavejustnoted
raisesFirstAmendmentconcerns.”WRTLII,551U.S.at473.
Byusingsuchillusoryfactorsandapplyingtheminsuchanamorphousway,therule
sweepsinto“exemptfunctionactivity”speechthatisclearly“genuineissueadvocacy,”thus
causingthe“factsandcircumstances”testbeunconstitutionallyoverbroad.
D.
PenaltiesNeedNotBeCriminaltoChillSpeech
TheGovernmentassertsthatthepenalties,here,arenotcriminal.Gov’tResponseBr.
at2(ECFNo.88,PageID2004).Butpenaltiesneednotbecriminaltochillspeech.281Care
Committeev.Arneson,638F.3d621,630(8thCir.2011)(“Althoughnocomplaintsagainst
the plaintiffs ever reached the criminal stage and no criminal prosecution was ever
threatened, non‐criminal consequences contemplated by a challenged statute can also
contributetotheobjectivereasonablenessofallegedchill.”)(citingBabbittv.UnitedFarm
Workers Nat’l. Union, 442 U.S. 289, 302 n.13 (1979)); Vermont Right to Life Committee v.
Sorrell, 221 F.3d 376, 382 (2d. Cir. 2000) (noting that fear of civil penalties can be as
inhibiting of speech as criminal prosecution). Regardless, criminal prosecutions for filing
falseorfraudulenttaxreturnsarepossibleiftheIRSweretodeterminethatanorganization
intentionallymisreporteditspoliticalactivitynumbersonitstaxreturn.26U.S.C.§7206‐
7607.
CONCLUSION
Fortheforegoingreasons,theCourtshouldgrantFreedomPath’sMotionforPartial
SummaryJudgmentanddeclarethe“factsandcircumstances”testunconstitutional.
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CERTIFICATEOFSERVICE
I hereby certify that on the 16th day of November 2016, I electronically filed the
foregoingwiththeClerkofCourtusingtheCM/ECFsystemwhichwillsendnotificationof
suchfilingtothefollowingcounselfortheGovernment:CarolineD.Ciraolo,JosephA.Sergi,
LauraC.Beckerman,LauraM.Conner,JosephR.Ganahl,JeremyN.Hendon,andGeraldA.
Role.
/s/ChrisK.Gober
ChrisK.Gober
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