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Freedom Path Inc. v. Internal Revenue Service

United States District Court, N.D. Texas, Dallas Division

July 7, 2017

FREEDOM PATH, INC., Plaintiff,
v.
INTERNAL REVENUE SERVICE, et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          SIDNEY A. FITZWATER UNITED STATES DISTRICT JUDGE

         The question presented is whether the “facts and circumstances” test of Revenue Ruling 2004-6-which is used by defendant Internal Revenue Service (“IRS”) to determine whether an organization that is otherwise exempt from federal income tax under 26 U.S.C. § 501(a) has made expenditures that subject the organization to income tax under 26 U.S.C. § 527(f), and to determine whether certain applicants qualify for tax exempt status-is unconstitutionally vague and/or overbroad, in violation of the First Amendment, or void for vagueness, in violation of the Due Process Clause of the Fifth Amendment. Concluding that Revenue Ruling 2004-6 is not unconstitutional on its face, the court denies plaintiff Freedom Path, Inc.'s (“Freedom Path's”) motion for partial summary judgment.

         I

         Because this case is the subject of three prior memorandum opinions and orders, see Freedom Path, Inc. v. Lerner, 2016 WL 3015392, at *1 (N.D. Tex. May 25, 2016) (Fitzwater, J.); Freedom Path, Inc. v. Lerner, No. 3:14-CV-1537-D, slip op. at 1 (N.D. Tex. July 29, 2015) (Fitzwater, J.); Freedom Path, Inc. v. Lerner, 2015 WL 770254, at *1 (N.D. Tex. Feb. 24, 2015) (Fitzwater, J.), the court will recount only the background facts and procedural history that are pertinent to this decision.[1]

         A

         The Internal Revenue Code exempts certain entities from income taxation. See 26 U.S.C. § 501(a). Among these entities are social welfare groups that are exempted from income taxation under § 501(c)(4). They include “[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare.” By regulation, “[a]n organization is operated exclusively for the promotion of social welfare if it is primarily engaged in promoting in some way the common good and general welfare of the people of the community.” 26 C.F.R. § 1.501(c)(4)-1(a)(2)(i). Policy issue advocacy, such as by mailings and television advertisements, is considered legitimate social welfare activity. See, e.g., Wisc. Right to Life, Inc. v. Barland, 751 F.3d 804, 809 (7th Cir. 2014). But “[t]he promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.” 26 C.F.R. § 1.501(c)(4)-1(a)(2)(ii). If a group that is tax exempt under § 501(c)(4) makes an expenditure for such a function-that is, an “exempt function”-the group may be subject to income tax under 26 U.S.C. § 527(f). The term “exempt function” refers to the function of influencing or attempting to influence the selection, nomination, election, or appointment of any individual to any federal, state, or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors, i.e., political campaign intervention activity. See 26 U.S.C. § 527(e)(2). A § 501(c)(4) social welfare group that engages in political campaign intervention is subject to taxation on the amount expended for that activity (or on the group's investment income for the year, whichever is less). See 26 U.S.C. § 527(f)(1). A social welfare group may, however, maintain a segregated fund for political campaign intervention activities. See 26 U.S.C. 527(f)(3). The segregated fund is treated for tax purposes as a § 527 political organization, which provides an avenue for social welfare groups to participate in political campaign intervention while still avoiding taxation.

         The IRS uses the “facts and circumstances” test of Revenue Ruling 2004-6 to determine whether a group that is otherwise exempt from federal income tax under § 501(a) has spent money on an “exempt function, ” thereby subjecting the group's income to tax under § 527(f). See Internal Revenue Service, Revenue Ruling 2004-6, 2003 WL 23009324, at *1 (2003). Of particular significance to the instant case, the IRS also relies on the test to determine whether applicants for tax exempt status under § 501(c)(4) qualify for such status. The IRS does this to determine whether an applicant's activity is “primarily” social welfare or is inordinately dedicated to political campaign intervention.

         The “facts and circumstances” test provides that

factors that tend to show that an advocacy communication on a public policy issue is for an exempt function under § 527(e)(2) include, but are not limited to, the following:
a) The communication identifies a candidate for public office;
b) The timing of the communication coincides with an electoral campaign;
c) The communication targets voters in a particular election;
d) The communication identifies that candidate's position on the public policy issue that is the subject of the communication;
e) The position of the candidate on the public policy issue has been raised as distinguishing the candidate from others in the campaign, either in the communication itself or in other public communications; and
f) The communication is not part of an ongoing series of substantially similar advocacy communications by the organization on the same issue.
. . .
[F]actors that tend to show that an advocacy communication on a public policy issue is not for an exempt function under § 527(e)(2) include, but are not limited to, the following:
a) The absence of any one or more of the factors listed in a) through f) above;
b) The communication identifies specific legislation, or a specific event outside the control of the organization, that the organization hopes to influence;
c) The timing of the communication coincides with a specific event outside the control of the organization that the organization hopes to influence, such as a legislative vote or other major legislative action (for example, a hearing before a legislative committee on the issue that is the subject of the communication);
d) The communication identifies the candidate solely as a government official who is in a position to act on the public policy issue in connection with the specific event (such as a legislator who is eligible to vote on the legislation); and
e) The communication identifies the candidate solely in the list of key or principal sponsors of the legislation that is ...

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