REGAN v. TAXATION WITH REPRESENTATION OF WASHINGTON
Two non-profit groups merged to form the group Taxation With Representation of Washington (TWR). One of the original groups obtained 501(c)3 status from the Internal Revenue Service (IRS), which allowed donors to make tax-deductible donations to it. Because the other group participated in political lobbying, it did not qualify for 501(C)(3) status and could not offer tax-deductible donations. Since the newly formed TWR also participated in "substantial lobbying," the IRS denied it tax-deduction privileges. TWR alleged in District Court that the IRS's "substantial lobbying" restriction for 501(C)(3) status violated its First Amendment rights by imposing an "unconstitutional burden" on its ability to receive tax-deductible donations. TWR also argued that the restriction violated its Fifth Amendment equal protection rights since veterans' organizations that lobbied extensively could receive tax-deductible donations. The District Court dismissed the complaint but the Court of Appeals for the District of Columbia ruled that the "substantial lobbying" restriction did impair TWR's Fifth Amendment equal protection rights.
Does the IRS violate the First Amendment by denying 501(c)3 tax-deduction privileges to non-profit groups that participate in "substantial lobbying"? Does the IRS violate the equal protection component of the Fifth Amendment by denying 501(c)3 tax-deduction privileges to non-profit groups that participate in "substantial lobbying"?
Legal provision: Amendment 1: Speech, Press, and Assembly
No and no. Justice William H. Rehnquist authored the opinion for a unanimous court. Allowing a non-profit to solicit tax-deductible donations is a form of paying for its operations. Pointing to its decision in Cammarano v. United States, the Court maintained that "Congress is not required by the First Amendment to subsidize lobbying." The federal government does not have to sponsor every activity that the First Amendment protects, and its choice to sponsor one type of activity does not force it to sponsor every related type of activity. The federal government can choose to support veterans' lobbying organizations without also having to fund the lobbying of other groups. Non- profit groups interested in offering tax-deductions to donors can separate with the parts of the organization engaged in lobbying.
ORAL ARGUMENT OF REX E. LEE, ESQ., ON BEHALF OF THE APPELLANTS
Chief Justice Burger: We will hear arguments first this morning in Regan against Taxation with Representation of Washington.
Mr. Solicitor General, you may proceed whenever you're ready.
Mr. Lee: Mr. Chief Justice, and may it please the Court:
Congress has provided two general types of tax relief, either or both of which may be available to certain kinds of organizations.
First, Section 501(c) exempts the income of about two dozen different types of organizations from taxation on that income.
Second, Section 170 entitles the donors to a smaller number of 501(c) organizations including both veterans groups and also groups qualifying under 501(c)(3) to deduct their contributions.
One of the qualifications for 501(c)(3) status, and, therefore, both tax exemption and also donor contribution deductibility, is that no substantial part of the entity's activity consists of attempts to influence legislation.
The proposed activities of the Appellee which has unsuccessfully sought recognition as a 501(c)(3) organization will consist principally of attempts to influence legislation.
It attacks the constitutionality of the scheme that I just described on two grounds.
The first is that withholding tax exempt status from 501(c)(3) or any other organizations which lobby is a violation of a first amendment right.
The second is that since Congress has afforded tax exempt status to veterans organizations which lobby but not to 501(c)(3) organizations which lobby, its equal protection rights have been denied.
The En Banc Court of Appeals unanimously held, and we agree, that the Appellees' first amendment argument is foreclosed by this Court's unanimous holding in Cammarano versus The United States that the constitution does not require Congress to subsidize First Amendment activity.
With respect to equal protection, the Court of Appeals further observed, and I am quoting, that
"Taxation also has a weak case solely in terms of equal protection because of Congress's vast leeway under the constitution to classify the recipients of its benefits and to favor some groups over others. "
Nevertheless, the Court of Appeals ruled that a heightened standard of equal protection scrutiny was applicable and that it was infringed in this case because First Amendment rights were affected even though they had not been infringed.
The Court remanded to the District Court with instruction to cure the unequal treatment which it found by one of two alternatives.
Mr. Lee: Well, did the Court of Appeals use that rather obscure phrase that you just used that First Amendment rights were affected but not infringed?
Mr. Lee: Well, it first held, Justice Rehnquist, that under Cammarano they had not been violated.
I think that is more my characterization, but I think that is the only fair way that the Court of Appeals' opinion can be read because of the effect upon First Amendment rights.
The Court identified as the most logical remedy option to impose the lobbying restriction on veterans organizations none of which is a party to this litigation.
It also identified another alternative: judicially enlarging the Congressional list of exempt organizations to include the 501(c)(3)'s which the Court observed, correctly in our view, might open a Pandora's box of woes and abuse.
In our view, the underpinning of the Court of Appeals' holding has to be that Congress has violated the equal protection clause even though there is no direct infringement of a First Amendment right if Government treats different groups of people in different ways and the deferential treatment comes to rest on a First Amendment or other fundamental right interest.
That is the combination of circumstances that brings the equal protection guarantee into play.
Whatever appeal that argument might have had, if we were at the dawning of its day in Court, I submit that it comes too late because it has already been considered and rejected by this Court which has held on at least three separate occasions that Government subsidization of one group but not another even where the fundamental rights of the nonsubsidized group will be affected violates no constitutional guarantee.
Buckley versus Valeo, for example, upheld provisions of the Internal Revenue Code which granted public funds to the candidates of major parties but not minor parties.
There was clearly unequal treatment, and there was an arguable impact on First Amendment values.
Similarly, in Monner versus Roe and Harris versus McRae congressional statutes providing medicaid funds for indigent live births but prohibiting such funds for abortions were attacked on the same grounds advanced here, namely, that the impact of the different treatment came to rest on a fundamental constitutional right of the disfavored group, namely, the right to decide whether or not to have an abortion.
Mr. Lee: But the Court in those cases left open a situation which I take it you are going to come to.
Mr. Lee: Yes, but the difference of treatment in those cases was undeniable, and the effect was on a fundamental constitutional right.
Nevertheless, the Court held that there was a legal protection violation because there is a basic difference between direct state interference with a protective activity and state encouragement of an alternative activity consonant with legislative policy.
Now the difference between those cases and the instant case: in our view there are two that are relevant, and both of them make this case a stronger case for constitutionality than in Harris and in Monner.
The first difference is that in those cases the two things that were treated differently were mutually preclusive competitors.
That is to say, the statutorily preferred event which was birth necessarily precluded the constitutionally protected abortion decision by the indigent person so that to whatever extent funding encourages child birth, abortion is necessarily inhibited.
Here by contrast, subsidizing veterans groups has no automatic detrimental effect on charitable groups.
The second difference, and in my view the more important one, is that the classification in this case is part of our national acts of laws.
This Court has made it very clear that for equal protection purposes, income tax cases are in a class by themselves.
The Internal Revenue Code is perhaps without peer in its intricacy, its detail, and its sheer length.
By their very nature, most income tax provisions classify.
Their function is to identify under what circumstances the burden of different groups in our society, the share of the National tax burden borne by different groups is to be either increased or decreased.
In carrying out this function, Congress necessarily treats different people in different ways, and many of those differences have an arguable impact on a fundamental right.
Importing heightened scrutiny as the test governing the constitutionality of that kind of a complex and inner-related statutory construct would seriously damage the certainty and the predictability that should be characteristic of our national tax laws.
Aside from everything else that ought to go into a fair tax system, it is important that taxpayers know with as much certainty as possible what their obligations are.
That certainty value is enhanced by the rational basis equal protection has because of the likelihood that it ensures that the congressional judgment will in fact survive.
It is diminished, correspondingly, by a test of heightened scrutiny.
Look at the matter from Congress's standpoint.
It is probable that the time will never come when Congress does not have before it some proposal for change in the income tax law.
Congress's ability to respond to new developments, new information, new understanding is a difficult enough task under any circumstances.
It should not be rendered even more burdensome by increasing the likelihood that the judgments that Congress makes will be turned around by the Courts.
Take this case, for example: Section 501(c) consists of 22 categories.
It comes of no surprise to anyone that the Court of Appeals found that two of those categories resulted in a difference in treatment to their occupants.
Of course, there are differences in treatment.
If Congress had not intended differences in treatment, there would not be 22 categories.
The point is that the entire Code, and not just these 22 categories, essentially consists of differences in treatment.
That, I submit, is why this Court has consistently accorded great deference to Congressional line drawing in the income tax area.
It is repeatedly stated, and most recently in San Antonio versus Rodriguez, that in taxation, even more than in other fields, legislatures possess the greatest freedom in classification.
That brings me to the final point.
That is whether the distinction between lobbying by veterans groups on the one hand and lobbying by 501(c)(3) organizations on the other satisfies this deferential standard.
Quite clearly, it does.
Prior to 1934 there were no express statutory limitations on lobbying by exempt organizations.
Congress was concerned, however, in 1934 that the deductibility of contributions to organizations otherwise classified as religious, charitable, or education could effectively translate into the public financing of private propagandizing on a range of subjects limited only by the donor's whim and the attractiveness of that abuse increased with the donor's wealth.
It was a concern that was first expressed by Judge Hand for a unanimous Court of Appeals for the Second Circuit in 1930 in a case called Slee versus The Commissioner, and as this Court observed in Cammarano, the 1934 act made explicit the conclusion derived by Judge Hand in 1930 in Slee.
Very simply, there are differences between veterans organizations on the one hand and 501(c)(3) organizations on the other that are highly pertinent to this concern first expressed by Judge Hand in 1930 and then ratified by Congress in 1934.
In the first place, there are quantitative differences.
The number of veterans organizations is only a fraction of the total number of the 501(c)(3) groups, and the 501(c)(3)'s collect about 1500 times as much in contributions as do the veterans groups.
Even more important, these organizations structurally by virtue of the way they are chartered by Congress and in fact carry out their operations do not offer the opportunities for abuse identified by Judge Hand in 1930 and by Congress in 1934.
The veterans organizations were--
Mr. Lee: Solicitor General Lee?
Mr. Lee: --Yes.
Mr. Lee: What if Congress instead of giving the veterans organizations a break in the tax statute had simply appropriated $5 million to each of them?
Do you think that would be challengeable in Court at all?
Mr. Lee: I do not.
Mr. Lee: This really isn't much different.
Mr. Lee: I think it is not very much different.
I think this Court has made that very clear, and it brings into play another body of doctrine that is also determinative in this case.
Mr. Lee: Has not the Congress over a period of years granted a great many benefits to veterans?
Mr. Lee: Precisely.
They have been consistently upheld.
The most recent that I am aware of is Johnson versus Robison in which this Court upheld the deferential treatment insofar as veterans' benefits were concerned to conscientious objectors and to those... the benefits went to those who had seen actual combat duty, and the challenge was by a conscientious objector.
The point is, as set forth in our brief, the figures that have been released by the Government demonstrate that two out of five of every American citizen is a beneficiary in one way or another of veterans' legislation which has been passed by Congress.
Just as is the case with the income tax laws, this Court has also clarified that there is a great deal of deference to which Congress is entitled in determining the benefits to which those persons are entitled who have made a great sacrifice for the benefit of this country, both in terms of interrupting their civilian pursuits and also in terms of risking their life and their health.
Mr. Lee: Mr. Solicitor General, may I go back for a moment to your comment that there are only two differences between the abortion cases, the funding case, and this case?
Do you think the abortion cases would have been decided in the same way if the people on welfare who wanted abortions not only didn't have them financed by the Government but if they had an abortion they then lost their welfare benefits?
Here, as I understand it, the 501(c)(3) organization loses its exemption if it engages in lobbying.
This is the same question that I raised that you haven't yet answered.
Mr. Lee: Yes, and I plan to do so right now.
I think it is not at all clear to me that Monner and Harris would have been decided in the same way if the consequence had been to lose welfare benefits for a couple of reasons.
One is I think another principle that comes to play is whether Congress has acted in such a way as to solve the problem that was immediately before it.
At least a very strong argument could be made that that was simply sweeping too broadly with the revenue.
In this instance, by contrast, the problem that Congress has identified is the problem of the 501(c)(3) with unidentifiable size of membership and type of membership and the potential that it offers for a small number of wealthy individuals to have their expression of public views, their lobbying if you will, subsidized by the Government.
In this instance, Congress has not swept any more broadly than is necessary to solve the particular problem.
Mr. Lee: Well, I suppose you say they are wealthy persons because they are rich enough to contribute to a charity, but by hypothesis, I suppose, the lobbying is for a charitable purpose which the Government recognizes is in the general public interest, or otherwise they wouldn't give them the tax exemption in the first place.
Mr. Lee: Yes, and in Slee, of course, the problem was attacked by defining what is meant by "charitable", and what Judge Han did in that case was to uphold the Government's position that it isn't really charitable if it is being used for lobbying purposes.
Now, what this really does is to make administratively more feasible to administer by eliminating the need on a case-by-case basis to determine whether it is charitable, but in any event, I think there is this distinction in your abortion hypothetical and the case at... of course, the other distinction... the other two distinctions are the rules applicable to veterans' cases and applicable to tax cases.
Mr. Lee: Well, General Lee, I suppose the Appellee can set up a separate corporation to do its lobbying and preserve the 501(c)(3) status for everything else.
Mr. Lee: The Court of Appeals in fact pointed that out, and that is our understanding.
Mr. Lee: Do you agree with that?
Mr. Lee: They can.
Yes, they can set up a separate 501(c)(4).
Now, they will tell you I think in fairness.
Mr. Lee: Wouldn't the IRS be the first to move in and say these are twin corporations, and, hence, they will lose their--
Mr. Lee: Well, it depends on what the relationship is between them, and that's the disadvatage, Justice Blackmun, as you correctly point out.
It is not that clear.
In the event that there is an attempted subsidy by the 501(c)(3) group of the 501(c)(4), then, yes, that is not permitted, and as a consequence that is not a complete answer.
Mr. Lee: --It is certainly not so easy to answer.
Mr. Lee: That's right.
I have found that it is less easy as the Court of Appeals applied in fact.
Mr. Lee: General Lee, I am not quite certain what happens to an organization, a 501(c)(3) organization, which does lobby.
Did you say that it actually lost its exemption?
Mr. Lee: That is correct.
Mr. Lee: Is that correct?
I thought perhaps it just lost its right to have contributions deductible.
It actually loses?
Mr. Lee: That's right.
It is demonstrated by this case.
There was an application made for 501(c)(3) status for a determination under Section 7428 that this was a 501(c)(3) organization.
It described 501(c)(3) status as the status which entitles initially to income tax exemption, and then Section 170 in turn keys into 501(c)(3) status in terms of deductibility.
It was determined not to be a 501(c)(3) entity because of its lobbying and, therefore, loses both the deductibility and also the tax exemption terms.
Mr. Lee: General Lee, one of the amicus briefs argued that there was no jurisdiction under Section 7428 to make a constitutional attack on the validity of tax statutes.
I know that in a footnote in your reply brief you indicated disagreement, but it seemed that was worth a comment at least because that statute seems to be set out to provide only review by the Commissioner of administrative matters, not to raise constitutional issues.
Mr. Lee: It certainly can be interpreted in that way, Justice O'Connor.
We submit that in that respect it is susceptible of interpretation either way.
The crucial language is that the Court on one of these 7428 reviews may make a declaration with respect to such initial qualification or continuing qualification.
Now, two points: one is that an argued qualification is broad enough to include the constitutional issue, and the second is that particularly where you have some ambiguities which I think we certainly have here that it is proper to look to Congress's purpose.
In this case, the congressional purpose was rather clear.
It was to undo the inequity that resulted as a result of the decisions in Bob Jones versus Simon, the 1974 decision, the companion case that came down the same day in Americans United.
The only way one of these 501(c)(3) or other types of organizations could obtain a determination as to whether they did or did not qualify was to either have a refund suit in the District or to go into the Tax Court.
Now, since the objective law is to provide one simply remedy for determination of 501(c)(3) status vel non, it would be a bit anomalous to say that Congress intended to split those out and require constitutional determination through the old and more difficult process.
For that reason, we don't think that 7824 precludes the constitutional issue.
Mr. Lee: One other question if I may.
Do you think that this Court's recent holding in Perry Education has anything to do with this case?
Mr. Lee: Well, I think it helps us to an extent.
It certainly is not as on point as Cammarano, but, nevertheless, it does show the flexibility, other things being equal, insofar as the judgment of the policy-making bodies is concerned.
Yes, Perry does support us.
Mr. Lee: Flexibility for the First Amendment?
Mr. Lee: Well, the ability of that amendment to make accommodation in the light of other policies, in this case it enforces at least Cammarano's holding that when you have an arguable effect as you do in this case on a First Amendment interest that comes about because of an income tax classification, that you judge the case as an income tax and you defer to Congress's judgment in that case.
Indeed, I know of no instance in which this Court has ever applied anything other than the rational-basis test in equal protection income tax cases.
Mr. Lee: May I ask one other question?
Mr. Lee: Yes.
Mr. Lee: Forgetting for the moment the equal protection phase of the case because I think part of your position that all charitable organizations are not fungible, veterans are different from--
Mr. Lee: Right.
Mr. Lee: --Do you think your First Amendment argument is equally strong regardless of the character of the organization?
Say it is Aid to the Blind or something, and you are a group which just tries to promote legislation which will help the group.
Mr. Lee: I do, Justice Stevens.
You can argue that Cammarano was distinguishable, but I think that the principle that was established in that case carries through to Congress can make the decision as to which kinds of First Amendment activity it wants to subsidize and which kinds it does not which really brings it back to an equal protection--
Mr. Lee: But you have acknowledge, I think, that there is more than subsidy at issue.
It isn't just deducting the portion of the income that is spent on lobbying.
It has required them to lose their entire exemption.
Mr. Lee: --That is correct, and it is different from Cammarano in that respect.
My answer is twofold.
The first is that in that instance, Congress went no further than it needed to go in order to cure the problem it identified.
The second is that whether it is--
Mr. Lee: Here in effect, my Aid to the Blind organization is losing a very valuable exemption because it engages in a protected activity.
That's all it does.
I assume that the lobbying is a protected activity.
Mr. Lee: --Yes, but it is just as true here as it was in Buckley and in Monner and in McRae, and in those last two cases the Court said,
"It's not as though the Government were saying you can't have an abortion. "
Mr. Lee: No, but in none of those cases did the claimant lose anything.
He just wasn't allowed to finance it.
Mr. Lee: That's true and there is that distinction as we have observed.
As I say, my answer to it is--
Mr. Lee: Is there any other case in which merely because a party engaged in an activity protected by the First Amendment that the Government was allowed to take something away from it?
Mr. Lee: --So far as I know, at least in that respect, you will be making mula in this case, but I submit to you that the principle from which that mula ought to be made has been declared by Cammarano, and that is that it is after all a matter of Congress's determining how certain activities should be financed and how valuable those activities are to Congress, and I would like to save the rest of my time.
Mr. Lee: I take you stand by your... I think it is in your reply brief... you suggest that the First Amendment issue isn't here at all.
Mr. Lee: That is correct.
Mr. Lee: It isn't properly here.
Mr. Lee: That is correct for reasons set forth in that footnote.
Chief Justice Burger: Mr. Sims?
ORAL ARGUMENT OF JOHN CARY SIMS, ESQ., ON BEHALF OF THE APPELLEE
Mr. Sims: Mr. Chief Justice, and may it please the Court:
In this case, Appellee challenges the severe penalty which is imposed on public charities if they choose to engage in substantial lobbying as a means of promoting their charitable purposes.
Let me emphasize at this point that the case only involves public charities, that is, organizations under Section 501(c)(3) which are not private foundations.
Private foundations are groups that, as defined in the Tax Reform Act of 1969 and the IRS Regulations implementing that statute, are groups where there is not seen to be enough accountability to the public to assure that the organization will act in the same way that it would if it were accountable to the public.
The Tax Reform Act of 1969 virtually precludes lobbying by private foundations.
We think that is important because when the Solicitor General was referring to what he believes Congress was concerned about in putting into effect the restriction that we are challenging here, he is talking about the possibility that a charity might really not be acting for charitable purposes in particular circumstances.
It may be that a particular individual would be attempting to manipulate a charity or perhaps even set up a charity in order to serve private concerns.
Well, under the Tax Reform Act of 1969 Congress has already defined the group of organizations where there could be a legitimate concern that there is not enough public accountability, and Congress has acted independently, and that issue is not before the Court in this case.
Another point that I think is worth making with regard to the risk that a public charity might lobby in order to promote some private interest, we would like to point out that first of all to the extent that there is any risk in that regard, lobbying isn't any different than any other activities that a charity might engage in.
That is, I suppose one could say that there is some risk that a charity might engage in litigation or pamphleting or publishing of educational books in order to promote some private interest, so the argument made by the Solicitor General doesn't really hone in specifically on the lobbying issue.
As we have emphasized in our brief, there are also a number of independent restrictions that aren't challenged in this case that would prevent a public charity from using its resources for lobbying or for any other activity on behalf of private interests.
Under the IRS regulations in order to qualify in the first place for 501(c)(3) exemptions, you have to be operating for the public good rather than for a private good.
Mr. Lee: Are you suggesting, Mr. Sims, that IRS could make an evaluation in each case of each exempt taxpayer and say,
"You are 33 and a third percent over the line here, so we will cut off 33 and a third percent of your exemption? "
Mr. Sims: Your Honor, if Congress were to pass that alternative statute, that would deal with our argument about the disproportionate penalty.
To the extent that there was a penalty on lobbying that was tied in amount to the amount of excessing lobbying beyond whatever Congress said was appropriate, the disproportionate aspect of the current penalty would be eliminated.
We don't believe that would make the statute constitutional because you are still left with the core question that comes up in any First Amendment case which is first of all what is the congressional interest that is being promoted by the restriction, and secondly, has Congress in developing the particulars of the restriction done it in as narrow and as minimally restrictive a way as possible.
Mr. Lee: Mr. Sims, you suggested a moment ago that there was a distinction to be made between lobbying for a private interest or in the public interest.
Is that done by Congress or by the IRS?
Mr. Sims: That's part of Section 501(c)(3), Your Honor, in that no group can qualify under 501(c)(3) if there is going to be any inurement for the benefit of a private individual.
In addition, the statute itself says that any charity has to be organized and operated exclusively for exempt purposes.
Mr. Lee: So it is the common law concept of inuring to the private groups as opposed to the public groups.
Mr. Sims: It is a common law concept that has been incorporated in the statute, and that is also reflected in the regulations, so to the extent that one can discuss a concern about the possibility that lobbying might be directed to a private end, that is already dealt with in a number of other ways in the statute and in the regulations and, as you have indicated, in the common law of charities and trusts.
Mr. Lee: Well, the truth of the matter is if you set a trust for your own benefit, that is not charity.
Mr. Sims: Exactly, Your Honor.
Mr. Lee: Well, I don't understand your public and private.
What is a private charity?
Mr. Sims: A private foundation is--
Mr. Lee: I said a private charity.
Mr. Sims: --I'm not sure that there is such a--
Mr. Lee: You said the difference between the public and the private.
Mr. Sims: --Your Honor, the terminology that we have been using in our brief and that I have been trying to use today is public charity which is not a statutory term of art, but it is a term that is used often to refer to charities, that is, 501(c)(3) groups, which are not private foundations.
Private foundations are independently defined in Section 509 of the Internal Revenue Code.
The point I was making in this regard is that to the extent that it said that additional restriction on lobbying is necessary in order to prevent charities from engaging in activities improperly on behalf of private interests, that concern is already dealt with in other provisions in the code, specifically, the no-inurement provision in Section 501(c)(3), and also the operated-and-organized-exclusively-for-exempt-purposes provision of the code.
Mr. Lee: What would the Ford Foundation be?
Mr. Sims: Pardon, Your Honor?
Mr. Lee: What would the Ford Foundation be?
A public or a private?
Mr. Sims: I'm not sure.
I suspect it's probably a private foundation.
Mr. Lee: Well, what are you talking about if you don't know?
I'm trying to find out what is the line between a public and a private charity.
Mr. Sims: A private foundation is defined in Section 509 in terms of the sources of income, so--
Mr. Lee: I'm talking about charity, not foundation.
Mr. Sims: --Well, a private foundation under Section 509 is a subcategory of Section 501(c)(3) charities.
Mr. Lee: Just because you are named by an individual?
Mr. Sims: No, because the sources of revenue for that particular subcategory of charitable organizations comes primarily from a small number of sources rather than from the general public, so in enacting the Tax Reform Act of 1969, Congress indicated that there wasn't the same discipline of public support for those groups that there is for public charities, but this case only involved public charities.
Mr. Lee: Is there any issue like this in the cases as far as you know?
Mr. Sims: Involving--
Mr. Lee: This distinction.
I didn't hear it.
Mr. Sims: --Well, the distinction is only relevant to the extent that it addresses the concern expressed about the diversion of charitable resources to private benefits.
It is relevant in that regard.
As this Court has noted in the Bob Jones case, the denial of a tax exemption under Section 501(c)(3) can have disastrous consequences for a charity.
It means in effect that many contributors simply will not make contributions to the organization, and it may very well jeopardize the organization's ability to exist.
Mr. Lee: Mr. Sims, do you agree with the Solicitor General that a 501(c)(3) organization lobbying loses its exemption?
Mr. Sims: First of all, an organization is permitted to lobby up to the level of substantiality under Section 501(c)(3).
If an organization has already qualified under 501(c)(3) and it lobbies to an excessive amount, it does lose its exemption altogether.
Mr. Lee: Could it then qualify for 501(c)(4)?
Mr. Sims: It could up until the Tax Reform Act of 1976.
One of the changes that was made in 1976 was to provide... it created this election mechanism under Section 501(h), and the statute also said that if an organization is eligible to elect under Section 501(h), and all charities under 501(c)(3) are eligible to elect except churches and except private foundations, so any other public charity could.
If you are eligible to elect under 501(h), then if you lose your 501(c)(3) status because of excessive lobbying, then you can't qualify for (c)(4) status.
That was a change that was made in 1976.
The Solicitor General in referring to the Appellee organization said that the organization would primarily engage in lobbying.
We would like to clarify that in two respects.
First of all, all of the activities engaged in by Taxation must be directed to charitable ends.
We think that the distinction between lobbying as a mean and lobbying as some ultimate end is one that is reflected at a number of places in the Government's brief.
We never have argued that lobbying, per se, is a charitable purpose.
We emphasize that under the law of trust and under the common law and under the IRS regulations, lobbying is a proper means of promoting a charitable purpose.
The reason that Taxation couldn't qualify for Section 501(c)(3) tax exemption in this case is because it couldn't say ahead of time that it would not engage in substantial lobbying.
We have not indicated that lobbying is going to be the only activity carried on by the organization, and, in fact, the exemption application which is in the record in the case indicates that there are a number of other litigational and educational activities that will be carried on by the organization, but lobbying engaged in by Taxation will be exclusively a means of promoting a charitable end.
To the extent that the Solicitor General relies on Slee for the proposition that lobbying is not a proper purpose for promoting a charitable end and that somehow the use of that means rather than some other means of promoting a charitable purpose renders the purpose uncharitable, we suggest that even if Slee were properly decided in 1930, and that may be a close question, certainly the law since then has developed very strongly in the direction that lobbying is a proper means of promoting a charitable purpose.
The restatement of trust says it.
All the standard treatises on trust state it, and in fact, the IRS regulations say that charitable, which is the umbrella term which is used in the regulations, in Section 501(c)(3) is used in its generally-accepted legal sense.
In fact, in permitting charities to lobby up to the level of substantiality, Congress has implicitly recognized that lobbying is a proper means of promoting a charitable purpose.
The Government relies very heavily on three cases.
Cammarano, obviously, is the bedrock for the Government's position, and then there are the three more recent cases of Buckley, Mayer, and Harris.
I'll speak briefly about Cammarano which has already been discussed at some length in the exchanges between the Solicitor General and the Court.
We do want to emphasize that the penalty that is imposed on a charity which engaged in substantial lobbying is totally disproportionate to the amount of lobbying that is engaged in, and that makes a big difference in comparing this case to Cammarano.
In Cammarano there was a complete correspondence between the amount of the lobbying activity engaged in by the taxpayer and the tax consequences.
The taxpayer simply couldn't deduct the amount of money that was spent on lobbying.
In the case of a charitable group under Section 501(c)(3) the group loses its right to receive any tax deductible contributions.
As I mentioned before, if it has been an electing organization or eligible to elect under 501(h), you can't even qualify for a 501(c)(4).
Mr. Lee: So you are really challenging on First Amendment grounds the whole lobbying qualification in 501(c)(3).
Mr. Sims: Your Honor, we are challenging both.
We are challenging the restriction itself, and the more particular issue before the Court is the disparity in treatment between veterans groups and charities.
Mr. Lee: I understand that.
Do you think there is any merit in the suggestion that the First Amendment issue is not properly here at all?
Mr. Sims: Your Honor, we believe that the issue is here.
We out of caution filed a cross appeal raising specifically the First Amendment issue.
The Court hasn't acted on that.
We believe that because this is an appeal under Section 1252 though, the whole case comes up to this Court, and the Court has indicated that in the past although it hasn't specifically addressed this issue.
We certainly think that the issue is before the Court if the Court chooses to grant review.
Mr. Lee: What about your qualification to argue it as an Appellee?
Mr. Sims: Pardon me, Your Honor?
Mr. Lee: Suppose you had never filed a cross appeal.
Would you still be--
Mr. Sims: We believe... I think there is something to the Government's argument that the relief would be different, and if it weren't a 1252 case.
If it were a more conventional case, I think we might have had difficulty because if we prevail on the First Amendment issue, we would get relief that would be broader than the relief we got in the Court of Appeals.
Mr. Lee: --All right.
Mr. Sims: On Cammarano, we do think that the penalty issue is very important, that there is not the correspondence here that there was in the Cammarano case.
Secondly, of course, this case does have the equal protection issue.
The specific hold in Cammarano was that a non-discriminatory, even-handed denial of deductibility did not violate the First Amendment.
Of course, we don't have a non-discriminatory, even-handed across-the-board denial of tax benefits based on lobbying.
We have a situation in which certain groups... the veterans organizations... are allowed to lobby without limitation in support of their charitable purposes, and the 501(c)(3) groups must choose between the tax benefits of the statute and their freedom to engage in lobbying as a means of promoting their charitable purposes.
Mr. Lee: Do you suggest that Congress cannot distinguish between an organization formed let us say to help the handicapped and others of that kind where there is a great deal of public activity in the area that these activities supplemented?
Are you saying that Congress can't distinguish and have a more generous attitude toward the foundation or the exempt taxpayer assisting the handicapped, the blind, the hard of hearing, crippled?
Is it absolutely uniform across the board?
Mr. Sims: No, Your Honor.
We have never claimed that.
In fact, we wouldn't claim that--
Mr. Lee: Congress has an enormous respect for the veterans.
You are saying that the veterans are being treated more favorably than others; therefore, it must fall.
Mr. Sims: --The problem is not the favorable treatment.
The problem is that the favorable treatment is specifically directed to the area of First Amendment rights, and--
Mr. Lee: I'm addressing that.
More favorable treatment with respect to lobbying which everyone has the right to do of course.
Mr. Sims: --Your Honor, we don't believe that there could be more favorable treatment of that sort unless it can meet the First Amendment standard of review.
That is unless the congressional purpose in providing the preferred treatment is compelling and unless the restriction is crafted in such a way that there is a minimal restriction on First Amendment rights.
Buckley may be a good example in that respect.
I think that nobody can question the Court's... the logic of the Buckley decision when it says that there can't be a requirement that anybody who wants to run for President gets $20 million.
The Court pointed out that would encourage a multiplicity of parties, frivolous candidacies, and in effect it would undermine the very purposes for the statutory benefit scheme which was to change the way that elections were financed for the good, not to create greater chaos.
In Buckley the distinction that was made between existing party, the new party, was integral to the system of public financing of elections, but if there had been a statute that said that the Republicans or the Democrats could get funding, but the other major party can't, that would have been suspect under the equal protection clause.
We think that is essentially what is involved here.
It is discrimination among charities based on their identities.
It is specifically directed to the exercise of First Amendment rights, and it is not directed to the legitimate objectives that Congress certainly can implement if it chooses to do so to, for example, provide various other sorts of benefits to veterans: their educational benefits, re-employment benefits, medical benefits, and lots of others.
There is no problem in providing those in recognition of veterans' service to the country.
Mr. Lee: Mr. Sims, supposing the cure to the problem you are now addressing was to just say,
"Okay, we won't let the veterans lobby either without losing. "
What good would that do your client?
Mr. Sims: It wouldn't, Your Honor, and we don't think that is the appropriate relief.
Mr. Lee: It would remove the illegality which you are now purporting to describe.
Mr. Sims: --That's right.
It would not solve the equal protection argument that we are making, but it would solve the equal protection disparity.
As we have noted in our brief, we are not aware of any situation in which this Court has found an equal protection violation and then remedied by saying,
"We will take something away from the parties that aren't before the Court rather than giving something to the party who is. "
That in some cases involved very substantial drains on the Federal Treasury.
For example, when you have got a social security case in which widows can get a certain benefit and widowers can't and there is a challenge to it, and it is determined that that is an equal protection violation, if you are going to provide benefits to everyone, that means additional money is drawn out from the Treasury.
Nonetheless, this Court in those cases where an equal protection violation is found has uniformly extended the benefit.
Mr. Lee: So you don't defend the Court of Appeals' result in this respect?
Mr. Sims: No, and in fact no one does so far as I know.
The veterans groups obviously don't prefer the remedy suggested by Judge Mikva.
Mr. Lee: Then don't you have the jurisdictional problem that you are basically arguing for relief as an Appellee that was different than that granted by the Court of Appeals?
Mr. Sims: Yes, Your Honor, so that everything that I said before with regard to the First Amendment issue would be equally applicable to this except to the extent that I think this Court has in the past sometimes regarded a remedy--
Mr. Lee: Except with respect to your cross appeal.
Did you raise that in your cross appeal?
Mr. Sims: --Yes.
The two questions were the First Amendment issue and the remedy issue, but I think this Court in the past has sometimes reached the remedy issue in an equal protection case as an integral part of the whole case without necessarily granting review independently.
The other thing we would emphasize in that regard is this case does involve First Amendment rights, and in, for example, the picketing cases, I don't think it has ever been seriously suggested that if there is an equal protection violation because some people can picket at a particular location and other people can't that the proper solution is to prevent everyone from picketing.
Mr. Lee: But can you think of any case in which this Court has granted someone a benefit under the Internal Revenue Code which Congress didn't choose to grant them because of an equal protection argument?
Mr. Sims: I'm not aware of any tax case that does that, Your Honor.
Mr. Lee: But there is one case in this Court where it says that on equal protection argument, you cannot solve it by taking away from the other one, Cummins against the Board of Education, 1914.
Mr. Sims: I'm glad to hear about it.
Justice Rehnquist, I am reminded that although it is not a Federal tax case, the Spizer case did involve a tax benefit that had been denied.
Mr. Lee: That was a California--
Mr. Sims: That's right.
It was a state case, so it is not directly on point, but it may be analogous.
Mr. Lee: --While we are talking about remedy, may I ask you what you would suggest is the proper... if we put to one side for a moment the equal protection problem and just concentrate on the First Amendment and your argument that there is a penalty here, how do you cure that?
I can understand curing it on the Cammarano facts where you just allow a deduction for the amount expended, but how can you get partially qualified as a 501(c)(3) organization?
Mr. Sims: Well, we think that the right way to cure it would be to pass a statute that if there are particular abuses that are concerned relating to lobbying such as improper lobbying for private purposes, that the statute--
Mr. Lee: Suppose that Congress decides that 60 percent of your revenue is spent on lobbying and they don't want to subsidize the lobbying portion of your work.
Under the abortion cases would you agree they could do that if they could figure out administratively a way just to avoid financing the lobby?
Mr. Sims: --I don't think so, Your Honor, because in this case--
Mr. Lee: Well, then you really are not relying on the penalty aspect of the case.
Mr. Sims: --Well, we are relying on both.
I think that both of those arguments help us.
If you take the penalty argument out with regard to the abortion cases, the abortion cases still involve a situation where the Courts found that there are two competing interests each of which was valid.
There was the interest in preserving the life of the fetus, and there was the freedom of the potential mother to have an abortion.
The Court found... at one point I think the Court said in Harris against McRae that in applying the equal protection analysis that an abortion is not like any other medical procedure.
It cannot be compared because the interest of preserving life is involved.
In this case, the kind of discrimination that is involved is among speakers and among--
Mr. Lee: But my question is on the assumption that we are not troubled with... we say we agree with the Government that veterans are different from Aid to the Blind because taking away their exemption won't really help you, and we are just concerned with your First Amendment issue on its own bottom.
Is there any way to remedy the problem insofar as we might see a defect in the scheme because it penalizes you whenever you engage in substantial lobbying by taking away your entire exemption?
Is there any remedy that would be addressed to that alleged defect in the scheme?
Mr. Sims: --I haven't developed a specific one.
I'm sure it could be done.
I'm sure it could, but I don't think anybody in this litigation has put forward a specific proposal.
Mr. Lee: Does that sound like your position is that the Government must subsidize the lobbying?
Mr. Sims: No, Your Honor.
Mr. Lee: Just to be consistent with the First Amendment.
Mr. Sims: No, our argument is that the Government--
Mr. Lee: What limited relief besides that could you have?
How could the Government, as Justice Stevens asked, meet your objection without subsidizing lobbying?
Mr. Sims: --Well, I think Justice Stevens is asking whether a remedy could be developed that would prevent subsidy of lobbying but still allow deductibility for other charitable activities.
The point that I wanted to make is that we believe that the question is not whether Congress has to subsidize lobbying but whether Congress having chosen to allow these tax benefits to charitable groups which are engaging in socially beneficial activities and to allow those groups to litigate and to publish books and to carry on--
Mr. Lee: So you must keep the exemption going for people who lobby for charitable purposes.
Mr. Sims: --The Congress, if it is going to single out that category of First Amendment activity--
Mr. Lee: So, yes, they do.
So your position is that lobbying must be allowed by charitable organizations without losing the exemption.
That's your position.
Mr. Sims: --Yes, that is our position.
Mr. Lee: And must to that extent be subsidized.
Mr. Sims: Unless Congress could explain in a way that would meet this Court's First Amendment--
Mr. Lee: We see the problem, but we can't figure out administratively any way to avoid the... we have the two extremes.
We have either got to take your exemption away completely, or we have got to subsidize the lobbying.
We don't want to do the latter, so as a practical matter we have adopted the only feasible solution, and you haven't suggested that there is a feasible solution in-between.
Mr. Sims: --Well, the Tax Reform Act of 1969 shows that when Congress does what to specifically address an identified problem it can do it, and that's exactly what it did with regard to the perceived abuses and activities by private foundations.
Mr. Lee: But you have already conceded I thought in discussion that Congress can favor some entities like the veterans, the handicapped, over others.
Did I misunderstand you?
Mr. Sims: No, Your Honor.
That certainly is right, but I also I believe qualified that by saying that when the discrimination involves the exercise of First Amendment rights, Congress has to meet the very stringent requirements that are applicable when First Amendment rights are regulated, that is, Congress has to explain why some groups are being given enhanced First Amendment rights and others aren't, and it has to show that the restriction has been developed to minimally intrude on the exercise of First Amendment rights.
Mr. Lee: When the blind and the veterans engage in lobbying, it is to advance a broad public interest that has been recognized in other settings by Congress, is it not?
Mr. Sims: Yes, Your Honor.
The blind, the lame, and their representatives are the very people that are being denied their right to lobby in pursuit of their charitable interests, so we have an amicus brief which has been filed in this case by almost two dozen charitable groups of just the sort you have referred to: the Red Cross, the American Heart Association, and the Girl Scouts.
Mr. Lee: They don't have a case before the Court for us to make an evaluation of their problem, do they?
Mr. Sims: No, all their activities are limited by the same statute that limits Taxation's activities.
Like Taxation, Like all 501(c)(3) groups, they are limited to carrying out charitable purposes under Section 501(c)(3), and they are all limited with regard to the extent that they can use one particular means, lobbying, in order to accomplish their charitable purposes.
In the amicus brief, those charities have indicated that that restriction prevents them from carrying our their activities in support of the sick and the injured and the needy, and that they could do those jobs better if they could lobby.
In fact, they have indicated that in some cases lobbying may be the only way to accomplish a charitable goal, such as, for example, the Mental Health Association mentions that in many places there are archaic statutes that are on the books regarding the mentally handicapped or the mentally ill, and it is only by working for a revision of those statutes at the local or the state or the national level that they can accomplish their purposes.
We don't think that there is any basis for saying that there is an inconsistency between lobbying and the proper charitable purposes that 501(c)(3) organizations promote.
Chief Justice Burger: Do you have anything further, Mr. Solicitor General?
Mr. Lee: No, Mr. Chief Justice, unless the Court has some questions.
Chief Justice Burger: Thank you, gentlemen.
The case is submitted.