Constitution Daily

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The Constitution Outside the Courts: The Internal Revenue Service

December 3, 2013 by Lyle Denniston


Many Americans, not just the courts, help shape the meaning of the Constitution in the nation’s life.  This series explains the actual or potential contributions of those individuals, groups, or institutions.  Today’s Constitution-maker is the Internal Revenue Service.  With a significant potential for affecting the meaning of the First Amendment as it applies to money in national politics, the IRS has begun exploring a broad new policy on the role of tax-exempt organizations and their election campaign spending.


600px-US-InternalRevenueService-Seal.svgThe national government, for well over a century, has had enormous power to encourage the kind of cultural activity that benefits the nation as a whole by granting an exemption from federal taxes.  But it has always been clear that there is no constitutional right to tax exemption: It is allowed when an organization is found, by Congress through law applied by the Internal Revenue Service, to contribute to the public good, and in a way that does not contradict important public policy.


In one of the Supreme Court’s most important decisions spelling out the purposes of tax exemption in general, in the 1983 case of Bob Jones University v. U.S., the court said this:


“Entitlement to tax exemption depends on meeting certain common-law standards of charity – namely, that an institution seeking tax-exempt status must serve a public purpose and not be contrary to established public policy….The institution’s purpose must not be so at odds with the common community conscience as to undermine any public benefit that might otherwise be conferred.”


Among the reasons for the emphasis on public benefit, of course, is that allowing one organization to forego paying taxes may well mean that the taxpaying public is making up for that loss of revenue to the government, and that burden is justified because society as a whole presumably is better off from the works of the exempt entity.


Neither Congress, in legislating grants of exemption, nor the IRS, in carrying out tax-exemption policy, can do so in a way that would violate the Constitution.  That was well-illustrated by that 1983 decision in the Bob Jones University case: the court upheld the withdrawal by the IRS of tax-exempt status from that educational institution because of a racial policy on admission of students.  The court ruled that racial bias was so contradictory to public policy that the university had to forfeit its tax benefit even if that put a burden on its religious beliefs.


Actions by IRS to withdraw that tax favor from a group, or to establish a new policy that goes beyond an individual institution, may well be resisted by protests that the IRS is treading on constitutional rights – the very complaint that gave rise to the Bob Jones University case.


In the immediate aftermath of the IRS’s announcement last week that it is taking a broad new look at who can qualify for what is technically known as 501(c)(4) exempt status, the tax agency was faced with public protests that it was setting out to restrict First Amendment political speech activity.


For example, an Alexandria, VA, lawyer, Dan Backer, who represents groups whose political spending may be affected by a new IRA policy, told The Washington Post: “The IRS is approaching this as, ‘We are giving you the right to speak and you are going to speak within the confines we tell you.’ And that’s wrong.  This whole effort is simply a way to empower government to regulate speech.”


Congress has specified that 501(c)(4) organizations qualify for exempt status if they are “civic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.”  Since 1959, IRS has had a regulation that allows exempt status if an organization “is primarily engaged in promoting in some way the common good and general welfare of the people of the community.”


One of the benefits of 501(c)(4) status is that the organization need not publicly disclose who donates money to it – unlike some other tax-exempt organizations covered by a different provision of the federal tax code.


In the wake of the Supreme Court’s decision in 2010 in the case of Citizens United v. Federal Election Commission, broadly expanding the First Amendment right of corporations to spend money in federal election campaigns, there has been a rush by newly formed political corporations to seek the more favored, and more private, status. Some of the biggest spenders in recent campaigns have been these largely anonymous groups.  (The IRS, of course, got into deep political trouble for the way it went about examining which organizations would get that status, probing deeply into the applying organizations’ political beliefs.)


Last week, the tax agency said it was embarking on a wholesale reexamination of the entire 501(c)(4) issue, saying that it will try to work out a new policy that would determine the relationship between pursuing “social welfare” goals and pursing political aims.   It would exclude from “social welfare” – and thus from the 501(c)(4) equation – a category labeled “candidate-related political activity.”  The agency admitted that this might have the effect of narrowing eligibility for groups that now enjoy it.


In defining “candidate-related political activity,” the IRS is assigning itself a large role as Constitution-maker, since its definition inevitably will shape political expression in the form of campaign spending.  That role, of course, might be supported, or thwarted, if the IRS winds up in extensive court battles over the policy it shapes.


Lyle Denniston is the National Constitution Center’s adviser on constitutional literacy. He has reported on the Supreme Court for 55 years, currently covering it for SCOTUSblog, an online clearinghouse of information about the Supreme Court’s work.


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