Appendix — Regan v. Taxation With Representation of Wash.

la

APPENDIX A

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action No. 78-834

TAXATION WITH REPRESENTATION OF WASHINGTON,

PLAINTIFF

vs.

W. MICHAEL BLUMENTHAL, ET AL., DEFENDANTS

[Filed Jan. 31, 1979]

MEMORANDUM OPINION

Plaintiff Taxation with Representation of Wash-

ington (TWRW) has brought this action against

W. Michael Blumenthal, the Secretary of the Treas-

ury, Jerome Kurtz, Commissioner of the Internal

Revenue, and the United States of America for a

declaratory judgment under 26 U.S.C. § 7428 to

overturn a final denial by the Internal Revenue

Service of plaintiff’s administrative application for

a tax exempt qualification under section 501(c) (3)

of the Internal Revenue Code. Plaintiff has filed a

motion for summary judgment alleging that: (1)

section 501(c)(3) of the Internal Revenue Code

imposes an unconstitutional condition upon the exer-

cise of First Amendment rights; and (2) section

501 (e) (3) denies plaintiff the equal protection of

the laws in violation of the Fifth Amendment to

the Constitution. Defendant has filed a cross-motion

for summary judgment which denies both of plain-

tiff’s allegations. For reasons discussed below, we

grant defendant’s motion for summary judgment

and deny plaintiff’s motion for summary judgment.

2a

I. Statement of Facts

Both of the parties agree that there are no mate-

rial facts which will preclude a grant of summary

judgment. Plaintiff TWRW is a non-profit organiza-

tion which was formed for the purpose of represent-

ing the general public when tax issues are under

consideration in the Congress, the Executive Branch

and the courts. TWRW was formed to absorb and

carry forward the courtroom and legislative activi-

ties which were previously conducted by two other

non-profit corporations, Taxation with Representa-

tion (TWR) and Taxation with Representation Fund

(TWR Fund). The TWR Fund is classified by the

Internal Revenue Service as a tax exempt charitable

and educational group under section 501(c)(3) of

the Internal Revenue Code.“ TWR is classified by

the Internal Revenue Service as a tax exempt social

welfare organization under section 501 (e) (4) of the

126 U.S.C. § 501 (e) (3) exempts from taxation:

Corporations, and any community chest, fund, or founda-

tion, organized and operated exclusively for religious,

charitable, scientific, testing for public safety, literary,

or educational purposes, or to foster national or inter-

national amateur sports competition (but only if no part

of its activities involve the provision of athletic facilities

or equipment), or for the prevention of cruelty to chil-

dren or animals, no part of the net earnings of which

inures to the benefit of any private shareholder or indi-

vidual, no substantial part of the activities of which is

carrying on propaganda, or otherwise attempting, to in-

fluence legislation (except as otherwise provided in sub-

section (h)), and which does not participate in, or inter-

vene in (including the publishing or distributing of state-

ments), any political campaign on behalf of any candidate

for public office.

3a

Internal Revenue Code.“ Since activities pertaining

to current and proposed legislation constituted the

principal function of TWR, TWR did not qualify as

an organization exempt from federal taxation under

section 501(c)(3) because it could not meet the

requirement of that section that “no substantial part”

of its activities consist of “attempting to influence

legislation.” 26 U.S.C. 5 501 (e) (3). In order to

avoid the inefficiencies attendant to this division of

functions, TWRW was formed to absorb the public

interest law firm function of the TWR Fund (con-

sisting primarily of courtroom and administrative

representation of ordinary taxpayers) and the pub-

lic interest lobbying functions of TWR (consisting

largely of representation of ordinary taxpayers at

Congressional hearings).

After incorporation, TWRW applied to the In-

ternal Revenue Service for an exemption under sec-

tion 501 (e) (3). On February 14, 1978, the In-

ternal Revenue Service denied this application on

the ground that attempts to influence legislation may

constitute a substantial part of TWRW’s activities.

See Affidavit of Thomas F. Field, § 15, attached to

plaintiff's motion for summary judgment. (Field

Affidavit).

If TWRW were exempt from federal income taxa-

tion under section 501(c) (3) of the Internal Revenue

226 U.S.C. 5 501 (e) (4) exempts from taxation:

Civic leagues or organizations not organized for profit

but operated exclusively for the promotion of social wel-

fare, or local associations of employees, the membership

of which is limited to the employees of a designated per-

son or persons in a particular municipality, and the net

earnings of which are devoted exclusively to charitable,

educational, or recreational purposes.

4a

Code, it would also be eligible to receive contribu-

tions which would be tax deductible to donors under

sections 107(c)(2) (income tax), 2055(a)(2) (es-

tate tax), 2106(a)(2) (estate tax), and 2522(a) (2)

(gift tax), of the Internal Revenue Code. Because

contributions to TWRW are not tax deductible to

donors, plaintiff claims that denial of a section

501 (e) (3) exemption would reduce the amount of

funds which TWRW could raise from individuals.

In addition, foundations may be unlikely to con-

tribute to a non-exempt organization because sec-

tion 4945(d)(5) of the Internal Revenue Code sub-

jects foundations to tax liability if they make con-

tributions to an organization which engages in sub-

stantial lobbying.

II. First Amendment Challenge to Lobbying Limi-

tation of Section 501(c) (3)

Plaintiff contends that section 501(c)(3) imposes

an unconstitutional restriction upon the exercise of

First Amendment rights in two respects. First, it

alleges that the denial of a section 501(c)(3) ex-

emption to organizations which engage in lobbying

as a substantial part of their aetiviti is an uncon-

stitutional condition upon the exercise of First

Amendment rights, i.e., the right to engage in legis-

lative activity. Second, it claims that the section

501 (e) (3) lobbying limitation also restricts the ex-

ercise of First Amendment rights because it is a

discriminatory denial of a tax exemption for engag-

ing in speech. Plaintiff finally alleges that these

restrictions on First Amendment rights cannot be

justified because they are not supported by a com-

pelling governmental interest.

5a

A. Denial of Exemption as an Unconstitu-

tional Condition Upon First Amendment

Rights

It is beyond dispute that lobbying activities which

are directed toward influencing Congressional poli-

cies constitute an exercise of the First Amendment

right of petition. Eastern R. R. President Confer-

ence v. Noerr Motor Freight, Inc., 365 U.S. 127,

137-138 (1961); Liberty Lobby, Inc. v. Pearson, 390

F.2d 489, 491 (D.C.Cir. 1968). In addition, the gen-

eral advocacy of ideas is protected under the First

Amendment as part of our “profound national com-

mitment to the principle that debate on public issues

should be uninhibited, robust, and wide-open.” New

York Times Co. v. Sullivan, 376 U.S. 254, 270

(1964). The legislation-related activities which are

described in section 501(c)(3) are therefore clearly

protected by the First Amendment.

No organization may qualify for a tax exemption

under section 501(c)(3) if it has a “substantial

part” of its activities “carrying on propaganda, or

otherwise attempting, to influence legislation.” 26

U.S.C. §501(c)(3). This section does nui on its

face prohibit TWRW from engaging in substantial

efforts to influence legislation. The Court of Appeals

for the Fourth Circuit has recently addressed this

identical constitutional issue in .an action filed by a

related organization and has found that plaintiff’s

position is fully answered by the Supreme Court’s

decision in Cammarano v. United States, 358 U.S.

498 (1959). See Taxation With Representation v.

United States, No. 76-2418 (4th Cir., October 30,

1978). Following these precedents, we find that the

lobbying restriction of section 501(c)(3) does not

impose an unconstitutional condition on plaintiff's

First Amendment rights.

6a

In Cammarano, the Supreme Court upheld the

constitutionality of a regulation issued under the

Internal Revenue Code of 1939 which excluded from

deductions for “ordinary and necessary business ex-

penses” any amounts which had been expended “for

the promotion or defeat of legislation.” The Court

stated that:

Petitioners are not being denied a tax deduction

because they engage in constitutionally pro-

tected activities, but are simply being required

to pay for these activities entirely out of their

own pocketbook, as everyone else engaging in

similar activities is required to do under the

provisions of the Internal Revenue Code.

Cammarano v. United States, swpra, at 513. As was

the case in Cammarano, petitioners here are not

being denied a deduction because they engage in

constitutionally protected activities but instead are

merely required to fund these activities from their

own resources.“ Accord Haswell v. United States,

500 F.2d 1133 (Ct.Cl. 1974), cert. denied, 419 U.S.

1107 (1975); Christian Echoes National Ministry

v. United States, 470 F.2d 849 (10th Cir. 1972),

cert. denied, 414 U.S. 864 (1973); “Americans

United,” Inc. v. Walters, 477 F.2d 1169 (D.C.Cir.

1973), reversed on other grounds sub nom., Alezx-

ander v. “Americans United,” Inc., 416 U.S. 752

(1974).

The principal decisions upon which plaintiff relies, Speiser

v. Randall, 357 U.S. 513 (1958) ; Grosjean v. American Press

Co., 297 U.S. 233 (1986); First National Bank of Boston

v. Bellotti, —— US. ——, 98 S.Ct. 1407 (1978), and

Community-Service Broadcasting of Mid-America, Inc., ——

F.2d ——., No. 76-1081 (D.C. Cir. August 25, 1978), do not

distinguish Cammarano from the instant case.

7a

B. Discriminatory Denial of Exemption as an

Unconstitutional Limitation Upon First

Amendment Rights

Plaintiff contends that the decision in Speiser v.

Randall, supra established the general proposition

that “a discriminatory denial of a tax exemption for

engaging in speech is a limitation on free speech.”

Id. at 518. Reasoning from this proposition, plain-

tiff next asserts the section 501(c)(3) lobbying con-

dition is such a discriminatory denial because simi-

lar organizations enjoy the tax benefits which are

otherwise available to section 501(c)(3) organiza-

tions without having to satisfy the no substantial

lobbying requirement. See 26 U.S.C. §§ 501 (e) (4)

(exemption from taxation for social welfare organi-

zations); 501(c)(5) (exemption from taxation for

labor and agricultural organizations); 501(c) (6)

(exemption from taxation for business leagues and

chambers of commerce); 501 (e) (8) (exemption from

taxation for fraternal societies); 501 (e) (9) (ex-

emption from taxation for veterans’ organizations).

Moreover, because of a legislative development sub-

C. Standard of Judicial Scrutiny

Because of our holding that section 501 (e) (3) does

not involve an infringement of First Amendment

rights, this section is otherwise constitutional if it is

rationally related to a legitimate government pur-

pose. See generally United States v. O’Brien, 391

U.S. 367 (1968); Schenk v. United States, 249 U.S.

1

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these purposes.

9a

III. Equal Protection Challenge

As an additional constitutional challenge, plaintiff

alleges that section 501(c)(3) constitutes a denial

of equal protection violative of the Fifth Amendment

because similarly situated organizations are accorded

different treatment with respect to their lobbying

activities. A classification which accords differing

treatment to classes must be justified by a compelling

governmental interest if the classification affects a

“fundamental” right or involves a “suspect” class.

See, e.g., San Antonio Independent School District

v. Rodriquez, 411 U.S. 1, 40 (1973); Dunn v. Blum-

stein, 405 U.S. 330, 335-37 (1972); Shapiro v.

Thompson, 394 U.S. 618, 634 (1969). We have pre-

viously held that section 501 (e) (3) does not infringe

First Amendment rights which are fundamental.

Plaintiff does not, and cannot, contend that charita-

ble organizations are a “suspect” class. The applica-

ble standard of scrutiny is whether the challenged

classification is reasonably related to legitimate gov-

ernmental purpose. See, e.g., United States Depart-

ment of Agriculture v. Moreno, 413 U.S. 528, 534

(1973) ; Frontiero v. Richardson, 411 U.S. 677, 683

(1973). We have already held that section 501(c) (3)

satisfies this standard in the context of plaintiff's

First Amendment challenge. Accordingly, section

501(c)(3) also satisfies this standard in the con-

text of plaintiff’s equal protection challenge.

An order consistent with this opinion has been

entered this day.

/s/ John H. Pratt

JOHN H. PRATT

United States District Judge

January 31st, 1979.

10a

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

Civil Action No. 78-834

TAXATION WITH REPRESENTATION OF WASHINGTON,

PLAINTIFF

v8.

W. MICHAEL BLUMENTHAL, ET AL., DEFENDANTS

[Filed Jan. 31, 1979]

ORDER

Upon consideration of plaintiff’s motion for sum-

mary judgment, defendants’ cross-motion for sum-

mary judgment, plaintiff’s opposition thereto, and

the entire record of the action, it is this 31st day of

January, 1979

ORDERED, that plaintiff's motion for summary

judgment be and hereby is denied; and it is

ORDERED, that defendants’ motion for summary

judgment be and hereby is granted; and it is further

ORDERED, that this action be and hereby is

dismissed.

/s/ John H. Pratt

JOHN H. PRATT

United States District Judge

lla

APPENDIX B

UNITED STATES COURT OF APPEALS .-

FOR THE DISTRICT OF COLUMBIA CIRCUIT

No. 79-1464

TAXATION WITH REPRESENTATION OF WASHINGTON,

APPELLANT

v.

DONALD T. REGAN,

SECRETARY OF THE TREASURY, ET AL.

Appeal from the United States District Court

for the District of Columbia

(D.C. Civil Action No. 78-0834)

Argued En Banc October 14, 1981

Decided March 26, 1982

Before RoBINSON, Chief Judge, and WRIGHT,

TAMM, MACKINNON, Rops, WILKEY, WALD, MIKVA,

EDWARDS, and GINSBURG, Circuit Judges.

Opinion for the court filed by Circuit Judge MIxvA.

Dissenting opinion filed by Circuit Judge Mac-

KINNON, in which Circuit Judges Rong and WILKEY

concur.

12a

MikvA, Circuit Judge: Taxation with Representa-

required by Section 501(c)(3) of the Internal Reve-

Code, 26 U.S.C. § 501 (e) (3), as a violation of

First Amendment and equal protection rights.

whole of Taxation’s argument well exceeds the

of its parts. Taxation’s case is weak if it is

solely as a First Amendment claim, because

First Amendment activity. Taxation also has

case solely in terms of equal protection; Con-

has vast leeway under the Constitution to

the recipients of its benefits and to favor

groups over others. But a First Amendment

must inform the equal protection analysis

this case. Courts must scrutinize with special

re any act by Congress that facilitates the speech

one speaker over another, even when legislation

in the dry, classification-ridden context of

Revenue Code. By subsidizing the lob-

ties of veterans’ organizations while fail-

subsidize the lobbying of Taxation and other

ritable groups, Congress has violated the equal

protection guarantees of the Constitution. The dis-

trict court erroneously rejected Taxation’s constitu-

tional challenge, and we accordingly reverse.

Because this case is complex, it may be useful to

set out in advance the path that our reasoning fol-

lows. The opinion begins with an explanation of the

internal revenue provisions at issue (cited as I.R.C.

or by Section) and the discrimination established by

those provisions. In the second part of the opinion,

we explain why the statute’s classifications must be

given close judicial scrutiny. The third section then

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13a

identifies and assesses the substantiality of the gov-

ernmental interests said to justify the discrimination,

and concludes that the statute is unconstitutional.

The final section of the opinion discusses the appro-

priate remedy for this violation and the need for a

remand to the district court.

I. BACKGROUND

Taxation is a nonprofit charitable and educational

organization that was formed to represent the gen-

eral public on tax issues before Congress, the courts,

and the executive branch.’ After its incorporation

1 Taxation was created as the result of a merger between

two other organizations, Taxation with Representation Fund

(TWRF), a group devoted to courtroom advocacy, and Taxa-

tion with Representation (TWR), a group devoted to legis-

lative activity. TWR had been incorporated in 1970 as a

social welfare organization exempt from federal income taxes

under Section 501 (e) (4), 26 U.S.C. §501(c)(4) [herein-

after cited as I. R. C. ], but liable for unemployment taxes and

ineligible for tax deductible contributions under I.R.C. § 170.

In 1974, TWR was denied classification as a Section 501 (e) (3)

organization, and appealed unsuccessfully in Taxation with

Representation v. United States, 585 F.2d 1219 (4th Cir.

1978) , cert. denied, 441 U.S. 905 (1979).

Taxation apparently absorbed the functions of TWR after

TWR lost its appeal, see Brief for Appellee United States

(IRS Brief) at 4, and Taxation makes the same claims here

that were rejected by the Fourth Circuit. Despite this close

relationship between issues and parties, however, the govern-

ment has not pleaded or argued that Taxation should be pre-

cluded by res judicata from litigating this case, and we

decline to reach the question sua sponte.

Several litigants in this and other courts have also unsuc-

cessfully raised issues related to those we decide here. See, e. g.,

Christian Echoes National Ministry, Inc. v. United States,

470 F.2d 849 (10th Cir. 1972), cert. denied, 414 U.S. 864

(1978) (religious organization challenged loss of exemption

14a

in June 1977, Taxation applied to the Internal Reve-

nue Service (IRS) for a declaration that it was an

organization described in Section 501 (e) (3). Al-

as result of substantial legislative activity as violation of free

exercise clause); Haswell v. United States, 500 F.2d 1133

(Ct. Cl. 1974), cert. denied, 419 U.S. 1107 (1975) (taxpayer

sued for refund on theory that his contributions to organi-

zation that engaged in extensive lobbying should have been

deductible as charitable contributions); Taz Analysts & Ad-

vocates V. Shultz, 376 F. Supp. 889 (D.D.C. 1974), app. dis-

missed mem. sub nom. Tax Analysts & Advocates v. Simon,

512 F.2d 992 (D.C. Cir. 1975) (suit for declaratory judgment

that legislative activity restrictions of Section 501(c) (3)

were unconstitutional dismissed because action barred by

I. R. C. 5 7421 (a), barring suits to restrain or enjoin collec-

tion of taxes). Taxation with Representation was also a

party to the latter suit, but its complaint was dismissed with-

out prejudice. See 35 A. F. T. R. 2d 1352.

2 Section 501 (e) (3) applies to:

Corporations, and any community chest, fund, or founda-

tion, organized and operated exclusively for religious,

charitable, scientific, testing for public safety, literary, or

educational purposes, or to foster national or international

amateur sports competition (but only if no part of its

activities involve the provision of athletic facilities or

equipment), or for the prevention of cruelty to children

or animals, no part of the net earnings of which inures

to the benefit of any private shareholder or individual,

no iubstantial part of the activities of which is carrying

on propaganda, or otherwise attempting, to influence leg-

islation (except as otherwise provided in subsection (h)),

and which does not participate in, or intervene in (includ-

ing the publishing or distributing of statements), any

political campaign on behalf of any candidate for public

office.

(emphasis added). Such organizations are exempt from taxa-

tion under the income tax subtitle unless such exemption is

denied under I.R.C. §§ 502, 508, and 504.

15a

though Taxation otherwise qualified for tax-exempt

status under that section, it did not meet the require-

ments that “no substantial part” of its activities

consist of “attempting to influence legislation.” The

IRS specifically found that Taxation’s “stated pur-

poses include attempting to influence legislation, and

legislative advocacy may constitute a substantial part

of your activities.” Notification of Adverse Ruling,

February 14, 1978, Joint Appendix (J.A.) 48. Asa

result, Taxation was ineligible for several tax bene-

fits provided by Section 501 (e) (3), particularly the

eligibility to receive tax-deductible contributions

from donors.’

Taxation exhausted its administrative remedies,

and then sought in May 1978 to overturn the IRS

decision by bringing a declaratory judgment action

under I. R. C. § 7428.“ Upon consideration of cross-

motions for summary judgment, the district court

ruled for the defendants. Memorandum Opinion,

January 31, 1979, J.A. 56-64. Taxation appealed

the district court’s decision, and a three-judge panel

of this court decided on April 14, 1981, to uphold

the trial court. On June 11, 1981, a majority of the

full court of appeals voted to vacate the panel opin-

ion and rehear the case en banc.

See I. R. C. §170(c). Other tax benefits accruing to a

§ 501 (e) (3) organization include exemption from federal

social security taxes (FICA), I.R.C. §3121(a), and exemp-

tion from federal unemployment taxes (FUTA), I. R. C. § 3306.

J. R. C. § 7428 authorizes certain courts to issue declaratory

judgments in appropriate cases relating to the status and

classification of organizations under I. R. C. § 501 (e) (3). Con-

gress enacted this section of the Code as part of the Tax

Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1520.

16a

A. The Statutory Scheme

Before considering the issues presented by this

case, it is first necessary to examine the classifica-

tions that are under review. Congress has excluded

various types of organizations from the taxing pro-

visions of the Code, and I.R.C. § 501 “is the linchpin

of the statutory benefit system.” Simon v. Eastern

Kentucky Welfare Rights Organization, 426 U.S.

26, 29 n.1 (1976). This section describes several

dozen kinds of organizations that are exempt from

federal taxation on the income they receive.

There are other important components of the tax

benefits provided by Section 501 in conjunction with

other provisions of the Code, however. The chief

source of income for many of the nonprofit organi-

zations described in the statute is private contribu-

tions. In order to encourage such giving, Congress

has frequently provided that contributors to various

Section 501(c) organizations may take a deduction

based on the amount of the contribution. Because

the Code imposes three general taxes on individuals

—on income, gifts, and estates—the provisions allow-

ing contributors to take these deductions appear in

three separate portions of the Code. See I. R. C. 88 170,

2055, 2522. Aside from this complexity, however,

the general scheme is simple. Congress has accorded

certain organizations a double benefit: exemption

from taxes on their own income, and eligibility to

receive contributions and gifts that are deductible

from the donors’ taxes as well. Throughout this opin-

ion, tax exemption refers to the first benefit, and

tax-deductibility to the second.

Every organization described in Section 501 en-

joys some form of tax exemption, but only some

are eligible to receive tax-deductible contributions.

17a

The status of any particular organization, of course,

can only be ascertained by examining the other por-

tions of the Code that provide deductions to the or-

ganization’s donors. A further complication lies in

the fact that the Code differentiates among those

organizations eligible to receive tax-deductible con-

tributions in terms of the uses to which the organi-

zation’s income may be put. For the purposes of this

case, the crucial distinction promoted by Section 501

is between organizations that may not receive tax-

deductible contributions if they lobby substantially,

and organizations that may receive such contribu-

tions even if they do.

Section 501 (e) (3) organizations—sometimes sim-

ply called “charitable” organizations—are examples

of the former. A donor to such an organization may

deduct his contributions to it by virtue of the rele-

vant provisions in the Code. See I. R. C. § 170(c) (2)

(income tax deductions); I.R.C. §§ 2055(a) (2),

2106 (a) (estate tax deductions); I. R. C. § 2522 (a)

(gift tax deductions). The Code limits the amount

5 J. R. C. 5 170 (a) states the general rule“ that deductions

shall be allowed for any charitable contribution,“ defined in

subsection (e). Section 170 (e) defines “charitable contribu-

tion” as a contribution or gift to or for the use of

(2) A corporation, trust, or community chest, fund,

or foundation—

(A) created or organized in the United States

or any possession thereof, or under the law of the

United States, any State, the District of Columbia,

or any possession of the United States;

(B) organized and operated exclusively for re-

ligious, charitable, scientific, literary, or educational

purposes, or to foster national or international ama-

teur sports competition (but only if no part of its

activities involve the provision of athletic facilities

18a

of lobbying that may be conducted by the Section

501(c)(3) organization, however, whether or not

the lobbying is related to its exempt purpose.* See

or equipment), or for the prevention of cruelty to

children or animals;

(C) no part of the net earnings of which inures

to the benefit of any private shareholder or indi-

vidual; and

(D) which is not disqualified for tax exemption

under section 501(c)(3) by reason of attempting to

influence legislation, and which does not participate

in, or interevne in (including the publishing or dis-

tributing of statements), and political campaign on

behalf of any candidate for public office.

(emphasis added). Similar language permits donors to

make analogous deductions with respect to gift tax, I.R.C.

§ 2522(a) (2) (citizens or residents) and (b) (2) (nonresident

aliens), and estate tax, I. R. C. §§ 2055 (a) (3) (citizens or

residents) and 2106 (a) (2) (A) (ii) (nonresident aliens). Gift

and estate tax deductions will soon become of less significance,

however, in light of changes made by the Economic Recovery

Tax Act of 1981, Pub. L. No. 97-34, 95 Stat. 172. As a final

point, foundations may be deterred from contributing to an

organization lacking § 501(c) (3) status because foundations

and their managers are subject to tax if the foundation pays

any amount “to carry on propaganda, or otherwise to attempt

to influence leigslation.” I. R. C. § 4945 (a) and (d) (1).

See, e. g., Rev. Ruling 67-293, 1967-2 Cum. Bull. 185

(nonprofit organization that operates facility for protection

of stray animals does not qualify for exemption if a substan-

tial part of its activities consists of attempts to influence state

and local legislation related to welfare of animals) ; Kuper

v. Commissioner, 332 F.2d 562, 563 (3d Cir. 1964) (upholding

disallowance of deduction for contributions to local chapter

of League of Women Voters because of “the general legisla-

tive program of the League“); League of Women Voters v.

United States, 180 F. Supp. 379, 383 (Ct. Cl. 1960) (forum

discussions by members in formulating position to be taken

on questions of public interest held to constitute “preparation

19a

Slee v. Commissioner, 42 F.2d 184 (2d Cir. 1930).

Section 501 (e) (4) organizations, on the other hand,

are exempt from income taxes even if they engage

in substantial lobbying. These organizations are not

eligible to receive tax-deductible contributions, how-

ever.“

for the influencing of legislation“ and were therefore legisla-

tive activities). “In practice, the in terrorem effect of the

vague statutory proscription causes many charities to avoid

most direct or indirect efforts to support or oppose legislation,

even when the legislation is directly related to the charitable

purposes for which they are organized and operated.” Caplin

& Timbie, Legislative Activities of Public Charities, 39 L. &

ConTEeMP. P. 183, 196 (Autumn 1975). This effect flowed

from the inherent ambiguity of the statute. See Krohn v.

United States, 246 F. Supp. 341, 347-48 (D.Colo. 1965)

(meaning of “substantial” may vary with different types of

organizations, and may turn on extent of the organization’s

other noncharitable activities as well as the extent of its

charitable activities) .

Congress sought to ease this problem somewhat in the Tax

Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1720, which

allows certain public charities to be governed by new Code

sections 501(h) and 4911. These allow the organization to

devote a percentage of its resources to lobbying, and thus

provide explicit dollar ceilings on lobbying rather than re-

quiring the organization to adhere to the less certain “sub-

stantiality” test of Section 501(c) (3). All charities, however,

continue to have their lobbying restricted under one standard

or the other. “Taxation has not made, and does not plan to

make, an election to be covered by the new provisions.” Taxa-

tion Brief at 27 n.9. The new standard is accordingly not

before us and is of little relevance to the discussion below.

But see note 40 infra.

7 Section 501(c) (4) applies to:

Civic leagues or organizations not organized for profit but

operated exclusively for the promotion of social welfare,

or local associations of employees, the membership of

In contrast, other Section 501(c) organizations

may receive tax-deductible contributions without re-

gard to any lobbying limitation. Contributions to

certain cemetery or burial companies, which are

exempt under Section 501(c)(13), are deductible

under Section 170 (e) (5) without explicit statutory

limitations concerning lobbying activities.“ The same

is true of contributions to the federal or state gov-

ernments for exclusively public purposes. See Sec-

tion 170(c)(1). Labor unions and business leagues

are exempt under Sections 501 (e) (5) and 501(c) (6)

respectively, even if lobbying is their primary pur-

pose. Contributions to such organizations, usually in

the form of dues, generally are deductible only to the

extent they are “business expenses.“

Analysis of where other Section 501(c) organiza-

tions fall in this scheme is complicated by the fact

that IRS regulations may impose lobbying limita-

tions even when the Code itself is silent. Fraternal

beneficiary societies that operate through local lodges

and meet certain other requirements, for example,

which is limited to the employees of a designated person

or persons in a particular municipality, and the net earn-

ings of which are devoted exclusively to charitable, edu-

cational, or recreational purposes.

® Such companies must be barred by their charters, however,

from engaging in any other activities. I. R. C. § 170(c) (5).

These sections thus track I.R.C. § 162 (e), described in

more detail at pp. 33-34 infra. Section 162(e) was enacted

by Congress in 1962 to allow business to deduct the costs

of lobbying directly related to legislation of interest to the

taxpayer. If Section 501(c)(5) and (6) organizations use

dues for lobbying, the dues are deductible by contributors only

to the extent that the requirements of Section 162(e) are

satisfied.

21a

are exempt under Section 501 (e) (8).“ Although

contributions to such societies are tax-deductible only

if the contributions are to be used for the group’s

exempt purposes, the statute imposes no lobbying

restriction for gift or income tax purposes, but does

for estate tax purposes. Compare I.R.C. § 2055(a) (3)

(explicit limitation for estate tax purposes) with

LR. C. 5 2522 (a) (3) (no restriction for gift tax

purposes) and I. R. C. 5 170 (e) (4) (no restriction

for income tax purposes). Treasury Regulations ap-

pear to fill this gap, however. The regulations pro-

vide that a charitable fund operated by a fraternal

beneficiary society will not qualify for tax-deductible

contributions under these provisions if the society

is an “action organization,” which includes organiza-

tions that engage in substantial lobbying. Treas.

Reg. § 1.501 (e) (3)-1 (e) (3). See, e.g., id. § 25.2522

(a)-1(a) (4) (gift tax deductions); id. 5 1.170 A-

10 Section 501 (e) (8) and (10) provide for exemption of

(8) Fraternal beneficiary societies, orders, or associa-

tions—

(A) operating under the lodge system or for the

exclusive benefit of the members of a fraternity it-

self operating under the lodge system, and

(B) providing for the payment of life, sick, ac-

cident, or other benefits to the members of such

society, order, or association or their dependents.

(10) Domestic fraternal societies, orders, or associa-

tions, operating under the lodge system—

(A) The net earnings of which are devoted ex-

clusively to religious, charitable, scientific, literary,

educational, and fraternal purposes, and

(B) which do not provide for the payment of life,

sick, accident, or other benefits.

1(h) (5) (income tax deductions) ; id. § 2055(a) (es-

tate tax deductions). Despite the impression given

by the statute alone, then, fraternal beneficiary soci-

eties resemble Section 501(c)(3) organizations be-

cause they are barred by regulation from using tax-

deductible contributions to engage in substantial

lobbying.

Veterans’ organizations, which are exempt under

Section 501 (e) (19), require even closer analysis than

fraternal beneficiary societies. Unlike Section 501

(e) (3) organizations, veterans’ organizations are not

subjected to a lobbying limitation as a prerequisite

for receiving tax-deductible contributions. See, e. g.,

LR. C. 5 170 (e) (3) (income tax deductions); I. R. C.

52055 (a) (4) (estate tax deductions); I. R. C. § 2522

(a) (4) (gift tax deductions). Again, however,

Treasury Regulations condition exemption from in-

come taxes on whether such groups devote themselves

“exclusively” to certain veterans’ functions. See

Treas. Reg. § 1.501 (e) (19)-1. Moreover, the Treas-

ury regulations seem to require that veterans’ groups

obey a lobbying limitation in order to enable their

contributors to deduct donations for income tax pur-

poses, id. § 170A-1(h)(5), if not for estate or gift

tax purposes. In practice, however, veterans’ organ-

izations enjoy very different tax treatment. Counsel

for the government candidly admitted during oral

argument that the regulation governing deductibility

of contributions for income tax purposes is not en-

forced with regard to veterans groups, and the IRS

has stated that it will not challenge income tax de-

ductions taken with regard to donations made to

these groups. IRS Publication No. 78, Cumulative

List of Organizations Described in Section 170(c) of

the Internal Revenue Code of 1954 (1980).

23a

B. Consequences Suffered by Taxation

The effect of the statutory scheme, with regula-

tions engrafted, is that different exempt organiza-

tions receive disparate tax treatment depending on

their lobbying activities. Section 501(c) runs the

gamut from organizations that may lobby but receive

no tax-deductible contributions, e.g., Section 501(c)

(4); organizations that may receive tax-deductible

contributions but may not lobby, e.g., Section 501 (e)

(3); and organizations that in practice may do both,

i. e., veterans’ organizations under Section 501(c)

(19). An organization such as Taxation may not

receive tax-deductible contributions if it engages in

“substantial” lobbying, but a qualifying veterans’

organization may continue to receive tax-deductible

contributions even if it lobbies as much and on as

many issues as it chooses.

Perhaps as a result of this uneven treatment, vet-

erans’ groups such as the American Legion and the

Veterans of Foreign Wars are active before Congress

on a large number of different issues. The American

Legion and its affiliates have historically been among

the most active lobbying organizations on the national

scene.” Troyer, Charities, Law-Making, and the Con-

stitution: The Validity of the Restrictions on In-

fiuencing Legislation, 31 N.Y.U. INST. ON FED. TAX.

1415, 1439 (1973). Veterans’ organizations have

sought to influence legislation involving ratification

of the Panama Canal treaties, Alaska national parks,

national security issues, and elimination of Saturday

mail delivery." But a § 501 (e) (3) charitable organi-

1 See, e.g., Inclusion of Alaska Lands: Hearings Before

the Subcommittee on General Oversight and Alaska Lands

of the House Committee on Interior and Insular Affairs, 95th

Cong., Ist Sess. 100 (1977) (statement of Delmar L. Shull,

24a

zation, such as one formed to promote health care,

may not engage in substantial lobbying even when

the legislation relates directly to its exempt purpose,

say a bill for the construction of more hospitals.

Two preliminary arguments, which could be said

to concern standing, should be addressed before turn-

ing to the central issues of this case. First, the

government notes that because a charitable organiza-

tion may be exempt from payment of income taxes

under Section 501 (e) (4) even if it engages in sub-

stantial lobbying, Section 501 (e) (3) in no way con-

stitutes a direct governmental interference with Tax-

ation’s lobbying. Supplemental Brief for Appellee

VFW); Six-Day Mail Delivery: Hearings Before the House

Committee on the Post Office and Civil Service, 95th Cong.,

Ist & 2d Sess. 197 (1977-1978) (statement of Spike Brooker,

Commander, Post 58, American Legion) ; id. at 216 (state-

ment of Robert Copenbarger, VFW Post of El Paso); Postal

Service Act of 1977: Joint Hearings Before the Subcommittee

on Postal Operations and Services and Subcommittee on

Postal Personnel and Modernization of the House Committee

on the Post Office and Civil Service, 95th Cong., Ist Sess. 103

(1977) (statement of James F. O’Neil, publisher, American

Legion magazine) ; id. at 106 (statement of Donald H. Schwab,

director national legislative service, VFW); Department of

Defense Appropriations for 1977: Hearings Before a Sub-

committee of the House Committee on Appropriations, 95th

Cong., 2d Sess., pt. 8, 685-710 (1978) (National Security

Resolution adopted by the 59th National Convention of the

American Legion supporting, inter alia, development of the

B-1 bomber, M-X missile, cruise missiles, and reestablishment

of selective service system). Veterans’ organizations have

even lobbied on matters that presumably have special interest

to organizations such as Taxation. E.g., Tax Simplification

Proposals: Field Hearings Before the Subcommittee on Over-

sight of the House Committee on Ways and Means, 95th

Cong., Ist & 2d Sess. 234 (1977-1978) (statement of James

Lund, VFW).

25a

United States (IRS Supp. Brief) at 14. The implica-

tion is that Taxation has suffered no injury from

denial of Section 501 (e) (3) status because the provi-

sions of the Code “neither restrict Taxation’s lobby-

ing activities nor deny Taxation tax exempt status

because of its planned activities.” Jd. As the de-

scription of the statutory scheme shows, however,

disparate tax benefits depend on the specific statu-

tory provision under which an organiaztion is deter-

mined to be exempt from federal income tax. Taxa-

tion’s lack of Section 501(c)(3) status causes it

substantial disadvantages, notably exclusion from the

IRS “Cumulative List” of organizations entitled to

receive tax-deductible donations and foundation

grants.“ “[A]ppearance on the Cumulative List is

a prerequisite to successful fund raising for most

charitable organizations. Many contributors simply

12 IRS Publication No. 78, Cumulative List of Organizations

Described in Section 170(c) of the Internal Revenue Code of

1954 (1980) (periodically updated). “The listing of an or-

ganization in [the Cumulative List] signifies it has received

a ruling or determination letter . . stating that contributions

by donors to the organization are deductible as provided in

section 170 of the Code.” Rev. Proc. 72-39, 1972-2 Cum. Bull.

818. “The Service has announced that, with narrowly limited

exceptions, a donor may rely on the Cumulative List for so

long as the beneficiaries of his largesse maintain their listing,

regardless of their actual tax status.” Bob Jones University

v. Simon, 416 U.S. 725, 729 (1974). An organization’s loss

of this status, and “the crucial right to receive deductible

contributions,” is “tantamount to a death sentence.” Caplin &

Timbie, supra note 6, at 195. “From the practical point of

view, charities are not very much concerned about their own

taxes. . It is, however, vital that they qualify as exempt

charities in order that donors may deduct contributions made

to them.” Clark, The Limitation on Political Activities: A

Discordant Note in the Law of Charities, 46 Va. L. REv. 439,

445-46 (1960).

26a

will not make donations to an organization that does

not appear on the Cumulative List.” Bob Jones Uni-

versity v. Simon, 416 U.S. 725; 729-30 (1974). It is

therefore irrelevant to Taxation’s case that it might

lobby substantially and still be exempt from payment

of income taxes under Section 501 (e) (4).

A second preliminary argument suggested by

the government is related to the first. Because the

chief effect of Taxation’s refusal to comply with the

“no substantial lobbying” clause of Section 501 (e) (3)

is that its contributors may not make tax deductible

contributions, the government implies that Taxation

is not the proper party to bring this case. IRS Supp.

Brief at 19. “The attenuated effect on Taxation of

denying a deduction to its potential contributors” is

said not to constitute a “significant encroachment”

or “serious infringement” of Taxation’s right to

lobby, id., and “does not infringe Taxation’s First

Amendment rights,” id. at 26. This argument too

may be easily dismissed. Taxation has standing to

raise First Amendment claims on behalf of its mem-

bers and supporters,“ and it is clearly evident that

10 It is far from clear, however, that Taxation could seek

tax-exempt status as a social welfare organization after denial

of Section 501 (e) (3) status. n 1976, Congress provided that

a Section 501(c) (3) organization that forfeits its exemption

by lobbying may not then qualify as a social welfare organiza-

tion under Section 501 (e) (4). See I. R. C. § 504. Congress

enacted that provision to prevent a Section 501 (e) (3) or-

ganization from build ing] up an endowment out of deducti-

ble contributions as a charitable organization and then us [ing]

that tax-favored fund to support substantial amounts of lob-

bying as a section 501 (e) (4) social welfare organization.”

S. Rep. No. 938, pt. 2, 94th Cong., 2d Sess. 83, reprinted in

[1976] U.S. Cob Conc. & Ab. NEws 4030, 4107-08.

4 See, e.g., NAACP v. Alabama, 357 U.S. 449, 458 (1958)

(an organization may assert, on behalf of its members, cer-

27a

Taxation will be harmed if its contributors cease

giving it money. Regardless of the merits of its case,

Taxation undoubtedly is an appropriate party to

bring this action.

In short, Taxation has complained that Section

501(c) exposes the lobbying of various tax-exempt

groups to discriminatory tax treatment and thereby

violates Taxation’s First Amendment and equal pro-

tection rights. The statutory provision effectively

limits the ability of charitable organizations to pre-

sent to legislators their views on legislation even

when the legislation directly affects their charitable

objects. There is a difference, of course, between

showing that a statute has a discriminatory applica-

tion and that it is unconstitutional. But Taxation

has met the threshold requirement of demonstrating

injury from the unequal application of a statute,”

tain of their First Amendment rights) ; Bates v. Little Rock,

361 U.S. 516, 523 n.9 (1960). In Buckley v. Valeo, 424 U.S.

1, 12 (1976), the Court held that appellants had standing to

challenge a limitation of $1,000 on individual contributions.

The limitation “precludes most associations from effectively

amplifying the voice of their adherents” and “is simulta-

neously an interference with the freedom of [their] adher-

ents.” Id. at 22 (quoting Sweezy v. New Hampshire, 354 U.S.

234, 250 (1957) (plurality opinion) ).

1 The government also makes the astounding argument

that “discrimination” is not shown simply because of “dis-

parities in the treatment accorded somewhat similarly situated

taxpayers—particularly organizations exempt from tax under

different provisions of the Code,” and that “the federal tax

laws pertaining to the lobbying activities of tax exempt or-

ganizations are no less ‘neutral’ now” than they were in 1959,

before Congress enacted Section 162(e). IRS Supp. Brief at

24. The Supreme Court has soundly repudiated the conten-

28a

and it is to the constitutionality of that statute we

now turn.

tion that the demands of equal protection are met when the

law applies equally to all within the statutory class:

application among the members of the class defined by

Judicial inquiry . . does not end with a showing of equal

the legislation. The courts must reach and determine the

question whether the classification drawn in a statute

are reasonable in light of its purpose.

McLaughlin v. Florida, 379 U.S. 184, 191 (1964). See Skinner

v. Oklahoma ex rel. Williamson, 316 U.S. 535, 541 (1942);

Rinaldi v. Yeager, 384 U.S. 305, 308-09 (1966).

The dissent suggests that Congress has limited the lobbying

and political activities of the nation’s more prominent vet-

erans’ groups by incorporating them with federal charters

that “uniformly contain provisions barring them from engag-

ing in partisan political activity... Dissent at 33-34. This

raises several questions of fact not addressed by the district

court, including which of the nation’s 22,000 veterans’ or-

ganizations have such charters and whether these charters

are actually enforced. The Veterans of Foreign Wars, for

example, does not seem to have charter limitations on its

political activities. See 36 U.S.C. § 111 et seg. (1976). In-

deed, the VFW endorsed a presidential candidate in the 1980

election. See “The Republicans in Detroit; Veterans’ Group

Endorses Reagan,” Washington Post, July 17, 1980, at All.

Moreover, the fact that some veterans’ organizations are fed-

erally chartered does not distinguish them from section

501(c) (3) organizations, which may also have federal char-

ters. See, e.g., 36 U.S.C. §1 (1976) (American National

Red Cross); id. §21 (Boy Scouts of America); id. § 271

(Future Farmers of America) ; id. § 371 (United States Olym-

pic Committee); id. §461 (National Safety Council); id.

§ 881 (Big Brothers of America). Indeed, the juxtaposition

of veterans’ organizations and section 501(c) (3) organiza-

tions throughout this title illustrates the essential similarity

of these “private corporations established under Federal law.”

Id. § 1101.

II. THE APPROPRIATE STANDARD OF REVIEW

The starting point for our review must be deter-

mination of the appropriate standard to apply in

reviewing appellant’s constitutional claims. See Har-

ris v. McRae, 448 U.S. 297, 322 (1980). We find

that a high level of scrutiny is required because the

lobbying restriction of Section 501 (e) (3) constitutes

a limitation on protected First Amendment activity,

and because Taxation’s equal protection argument

therefore involves what is clearly a fundamental

right.“ In analyzing the differential treatment chal-

lenged here, the question then must be whether a

substantial governmental interest supports the classi-

fication and whether the classification is narrowly

drawn to serve that interest.

A. First Amendment Implications

There is no question whatsoever that lobbying

comes within the protection of the First Amendment.

See, e.g., California Motor Transport Co. v. Trucking

Unlimited, 404 U.S. 508, 510-11 (1972); New York

Times Co. v. Sullivan, 376 U.S. 254, 270 (1964);

Eastern R.R. Presidents Conference v. Noerr Motor

Freight, Inc., 365 U.S. 127, 137-38 (1961). It is

also beyond dispute that First Amendment freedoms

are fundamental rights in our society. See, ¢.g.,

Schad v. Borough of Mount Ephraim, —— U.S. ——,

49 U.S.L.W. 4597, 4599 (1981); Central Hudson

16 Because the challenged classification is created by federal

statutes, the equal protection guarantees of the Fifth Amend-

ment rather than the Fourteen Amendment apply. See, e.g.,

Buckley v. Valeo, 424 U.S. 1, 98 (1976); Weinberger v.

Wiesenfeld, 420 U.S. 636, 638 n.2 (1975); Johnson v. Robison,

415 U.S. 361, 364 n.4 (1974) ; Bolling v. Sharpe, 347 U.S. 497,

499 (1954).

80a

Gas ꝗ Electric Corp. v. Public Service Comm’n, 447

U.S. 557, 565 (1980). Were this a case in which

the government sought to suppress the lobbying ac-

tivities of Taxation directly, the appropriate level

of scrutiny would be us. See, e.g., N. A. A. C. P.

v. Button, 371 U.S. 415, 438-39 (1963); Bates v.

Little Rock, 361 U.S. 516, 524 (1960).

First Amendment rights are not abridged, however,

merely because the government refuses to subsidize

those rights. In Cammarano v. United States, 358

U.S. 498 (1959), the Supreme Court upheld Treasury

regulations that prohibited business deductions of

lobbying expenses on the ground hat governmental

refusal to underwrite lobbying costs does not violate

the First Amendment. See Harris v. McRae, 448

U.S. at 318 (whether Congress should subsidize the

exercise of a fundamental constitutional freedom is

“not a matter of constitutional entitlement”). For

the same reasons, in “Americans United” Inc. v.

Walters, 477 F.2d 1169, 1182, (D.C. Cir. 1973),

rev'd on other grounds sub nom. Alexander v. Amer-

icans United” Inc., 416 U.S. 752 (1974), this court

17 This statement was made in the context of only the first

of several constitutional arguments rejected in McRae, that

congressional restriction of the availability of certain medi-

cally necessary abortions under Medicaid impinged on the

liberty interests protected by the Due Process clause as

recognized in Roe v. Wade, 410 U.S. 113 (1973), and its

progeny. See 448 U.S. at 312. The Court elaborated the

theme later in the opinion: “It cannot be that because

government may not prohibit the use of contraceptives .. .

or prevent parents from sending their child to a private

school . . , government, therefore, has an affirmative constitu-

tional obligation to ensure that all persons have the financial

resources, to obtain contraceptives or send their children to

private schools.” Jd. at 318.

31a

followed Commarano in dismissing the appellants’

claim that Section 501(c)(3)’s lobbying restriction

violated the First Amendment on its face.“

Taxation makes a valiant attempt to avoid these

holdings by claiming that the lobbying restriction of

Section 501 (e) (3) constitutes an “unconstitutional

condition” on the exercise of its First Amendment

rights. In Perry v. Sindermann, 408 U.S. 593, 597

(1972), the Supreme Court explained that “even

though a person has no ‘right’ to a valuable govern-

mental benefit and even though the government may

deny him the benefit for any number of reasons,”

the government “may not deny a benefit to a person

on a basis that infringes his constitutionally protected

interests—especially, his interest in freedom of

speech.” Accord, McDaniel v. Paty, 435 U.S. 618,

626 (1978); Pickering v. Board of Educ., 391 U.S.

563, 568 (1968); Shelton v. Tucker, 364 U.S. 479,

485-86 (1960); Tygrett v. Barry, 627 F.2d 1279

(D.C. Cir. 1980). Cf. Speiser v. Randall, 357 U.S.

513, 518 (1958) (“conditions imposed upon the

granting of privileges or gratuities must be “ ‘reason-

able'). The Supreme Court’s decisions “have pro-

18 In reversing, the Supreme Court held simply that Ameri-

cans United’s request for injunctive relief requiring reinstate-

ment of its tax-exempt status was barred by the Anti-

Injunction Act’s prohibition against suits “for the purpose of

restraining the assessment or collection of any tax.” 416 U.S.

at 757 (quoting I. R. C. § 7421 (a)). The Court did not discuss

the merits of appellants’ case, other than noting that “[t]he

consequences of the present regime for § 501(c) (3) organiza-

tions can be harsh indeed... Id. at 763 n.14. See id. at

782 (Blackmun, J., dissenting) (implying no opinion on

merits of underlying controversy, but agreeing with court of

appeals that case presented a substantial constitutional ques-

tion).

82a

hibited conditions on public benefits which

dampen the exercise generally of First Amendment

rights, however slight the inducement to the in-

dividual to forsake those rights.” Elrod v. Burns,

427 U.S. 347, 358 n.11 (1976) (plurality opinion).

Taxation could enjoy the “public benefits” of Section

501(c) (3), provided it did not exceed a substantial“

level of lobbying. Because Section 501 (e) (3) ex-

pressly conditions receipt of these benefits on a

charity’s willingness to refrain from a greater level

of expression, Taxation contends, an unconstitutional

condition has been placed on the furnishing of these

tax benefits. “The Government has no obligation

whatever to grant tax advantages to charities, but

if it decides to do so, it cannot condition receipt of

the advantages on a surrender of First Amendment

rights.” Brief for Appellant Taxation (Taxation

Brief) at 21.

This argument has some strength, but we reject

its premise. It is true that under certain conditions,

the indirect aid granted through tax exemptiens and

deductions is the functional equivalent of a direct

government payment.” See Committee for Public

10 See, e.g., Surrey & McDaniel, The Tax Expenditure Con-

cept and the Budget Reform Act of 1974, 17 B.C. INDUST. &

Comm. L. REV. 679 (1979); cf. Dodyk, The Tax Reform Act

of 1969 and the Poor, 71 CoLum. L. REV. 758 (1971). The

government accepts the analogy between tax exemptions and

direct governmental subsidies for purposes of this case, while

cautioning that they have different characteristics. IRS Supp.

Brief at 11 n.12. See, e.g., Walz v. Tax Commission, 397 U.S.

664 (1970), which held that a property tax exemption for

religious organizations does not violate the Establishment

Clause of the First Amendment, there being no “genuine

nexus between tax exemption and establishment of religion.”

In Marker v. Shultz, 485 F.2d 1008 (D.C. Cir. 1973), this

33a

Education and Religious Liberty v. Nyquist, 413

U.S. 756, 790-91 (1973) (declaring a tax benefit sys-

tem invalid under the Establishment Clause) ; Green

v. Connally, 330 F. Supp. 1150, 1156-57 (D. D. C.),

aff'd mem. sub nom. Coit v. Green, 404 U.S. 997

(1971) (§501(c)(3) may not be used to benefit

racially discriminatory private schools). “To deny

an exemption to claimants who engage in certain

forms of speech is in effect to penalize them for such

speech. Its deterrent effect is the same as if the

State were to fine them for this speech.” Speiser v.

Randall, 357 U.S. at 518. Taxation’s argument would

therefore be troublesome if it were the case that the

government conditioned its provision of tax benefits

on a charitable organization’s waiver of First Amend-

ment rights.”

court held that tax exemptions for unions under Section

501(c) (5) did not constitute state involvement and prohibited

support for union political activities. “A tax exemption is

consistent with a ‘benevolent neutrality’ and government non-

involvement with the exempted organization.” Id. at 1006.

See Moose Lodge No. 107 v. Irvis, 407 U.S. 163, 173 (1972)

(state provision of necessary services such as police and fire

protection, given to everyone without connotation of approval

does not constitute fostering or encouragement of racial

discrimination).

2 If this were the case, we would be forced to decide whether

the restrictions on charities that received benefits under Sec-

tion 501(c) (3) were both important and necessary to assure

that the objects of the benefit program were attained. See,

e.g., Buckley v. Valeo, 424 U.S. 1, 57 n.65 (1976) (Congress

may condition candidates’ receipt of federal financing on

agreement to abide by limitations on overall campaign ex-

penditures) ; Civil Service Comm'n v. National Ass’n of Letter

Carriers, 413 U.S. 548 (1978) (upholding restriction of

political activity by federal employees). Taxation makes a

strong argument that lobbying activities are not inconsistent

34a

It is overly mechanistic, however, to suggest that

the Section 501(c)(3) lobbying restriction actually

is a condition on the receipt of tax benefits by chari-

ties. A group such as Taxation can easily structure

itself along dual lines, under both Sections 501(c) (3)

and 501(c)(4) of the Code, using the latter organ-

ization only for lobbying purposes.” Because Section

501 (e) (4) organizations may lobby freely without

losing the tax benefits for which they qualify, the use

of both subsections accords a charitable organization

full tax benefits other than the ability to lobby with

tax-deductible contributions—and this distinction is

entirely permissible under Cammarano. Charitable

organizations are simply not required to waive their

First Amendment rights in order to obtain public

benefits—they simply may not lobby with tax-

deductible contributions—and Taxation’s unconsti-

tutional condition” argument must therefore fail.

As we observed at the outset, then, Taxation has

no compelling claim based solely on the First Amend-

ment.” We reject “the notion that First Amendment

with charitable purposes, see, e.g., 2 RESTATEMENT (SECOND)

or Trusts § 374 (1959); IV R.W. Scott, THE LAW or

TrRUsTS § 374 (3d ed. 1967), but our disposition of Taxation’s

First Amendment claim makes it unnecessary to consider this

argument.

21 As noted above, see note 1 supra, Taxation in fact origin-

ally followed this dual organizational structure. Although a

Section 501(c) (3) organization may be barred from convert-

ing to a Section 501(c) (4) organization, see note 13 supra,

nothing keeps such an organization from forming a new arm

at any time and using non-deductible contributions made to it.

for lobbying purposes.

22 Taxation does not challenge the proscription against sub-

stantial lobbying” on grounds of vagueness, however, and that

question is not considered in this opinion. See Borod, Lobby-

35a

rights are somehow not fully realized unless they are

subsidized by the State.” Cammarano v. United

States, 358 U.S. at 515 (Douglas, J., concurring).

We also reject Taxation’s ‘unconstitutional condition’

argument, because charitable organizations are gov-

erned by no conditions other than those upheld in

Cammarano. Taxation has not shown that Section

501(c)(3)’s lobbying restriction abridges its First

Amendment rights.

B. Equal Protection Implications

Our discussion of Taxation’s First Amendment

claims does not resolve the appropriate standard of

review, because this is not a situation in which the

government refuses impartially to subsidize all lobby-

ing activities. Although the government need not

subsidize the exercise of First Amendment rights,

the question remains the appropriate standard of re-

view when government subsidizes the exercise of

First Amendment rights in a _ discriminatory

fashion.”

ing for the Public Interest, 42 N.Y.U. L. Rov. 1087, 1106-10

(1967) ; Clark, supra note 12, at 451-54; Troyer, Charities,

Law-Makng, and the Constitution: The Validity of Restric-

tions on Influencing Legislation, 31 N.Y.U. INST. ON FED.

TAX. 1415, 1456-62 (1973).

It may be misleading to treat First Amendment and

equal protection questions as though they were entirely sepa-

rate, however. In cases such as this, there is a distinct

interplay between these two constitutional principles. See

Emerson, The Affirmative Side of the First Amendment, 15

Ga. L. REV. 795, 802-03, 819 (1981) (discussing an equal

protection element in the first amendment guarantee” in the

context of governmental subsidies for speech). “The peculiar

identity of equal protection and first amendment analyses in

differential access cases follows logically from the explicit

In Speiser v. Randall, 357 U.S 513, 518 (1958),

the Supreme Court held that discriminatory denial

of tax exemptions for engaging in speech can imper-

missibly infringe First Amendment rights. Speiser

concerned a California statute that conditioned prop-

erty tax exemptions on the taking of a loyalty oath.

The Court held that even though the statute involved

merely the discriminatory denial of tax exemptions,

and not the direct suppression of speech, a strict level

of scrutiny was appropriate. “When we deal with

the complex of strands in the web of freedoms which

make up free speech, the operation and effect of the

method by which speech is sought to be restrained

must be subjected to close analysis and critical judg-

ment in the light of the particular circumstances to

which it is applied.” Id. at 520. After conducting

this close analysis, the Court concluded that Califor-

nia “clearly has no such compelling interest at stake”

as would jusify the operation of the statute. Id. at

529.7

constitutional desigination of speech as fundamental and from

the fact that the first amendment’s proscription against

censorship is itself simply a specialized equal protection guar-

antee.” Perry Local Educators’ Ass'n v. Hohit, 652 F.2d

1286, 1296 (7th Cir. 1981). See Kavst, Equality as a Central

Principle in the First Amendment, 43 U. Cut. L. Rxv. 20

(1975). The Supreme Court has recognized this interplay

many times. See, e.g., Carey v. Brown, 447 U.S. 455, 460-61,

466-71 (1980) ; Tinker v. Des Moines Independent Community

School District, 393 U.S. 508, 510-11 (1969) (although class-

rooms are not public forums, rule prohibiting students from

wearing armbands in protest of the Vietnam War struck

down in part because school did not prohibit wearing of other

symbols of political significance) .

Although it could be suggested that Speiser should be

understood as striking down a statute “frankly aimed at the

suppression of dangerous ideas,” 357 U.S. at 519, and there-

37a

Although Speiser was decided a year earlier than

Cammarano, nothing in the later case repudiates this

ruling. Indeed, Justice Harlan’s opinion for the

Court in Cammarano carefully distinguished the

earlier decision :

Speiser has no relevance to the cases before us.

Petitioners are not being denied a tax deduction

because they engage in constitutionally protected

activities, but are simply being required to pay

for those activities entirely out of their own

pockets, as everyone else engaging in similar ac-

tivities is required to do under the provisions of

the Internal Revenue Code. Nondiscriminatory

denial of deduction from gross income to sums

fore inapposite here, that interpretation conflicts with the

approach taken by the Court. Speiser was decided in 1958,

soon after the decision in Dennis v. United States, 341 US.

494 (1951). The California statute was an attempt to enforce

Article XX, § 19, of the California Constitution, which denied

tax exemptions to any “person or organizations which advo-

cates the overthrow of the Government of the United States or

the State by force or violence,” see 357 U.S. at 516. The Court

explicitly refused to reach the question of whether “Cali-

fornia may deny tax exemptions to persons who engage in

the proscribed speech for which they might be fined or

imprisoned.” Id. at 520. Instead, the Court applied strict

scrutiny to the “procedural safeguards” and “burden of proof”

established by the statute, id. at 521, and found that “this

allocation of the burden of proof, on an issue concerning

freedom of speech, falls short of the requirements of due

process.” Id. at 523. Although it may be correct that an

underlying hostility to the California sedition law actually

explains Speiser, see Pennsylvania v. Nelson, 350 U.S. 497

(1956), the Court itself was careful to decide the case in

light of the strict scrutiny that must be applied to discrimina-

tory tax treatment that implicates any First Amendment

rights.

38a

expended to promote or defeat legislation is

plainly not aimed at the suppression of dan-

gerous ideas.“ 357 U.S., at 519. Rather, it

appears to us to express a determination by

Congress that since purchased publicity can in-

fluence the fate of legislation which will affect,

directly or indirectly, all in the community,

everyone in the community should stand on the

same footing as regards its purchase so far as

the Treasury of the United States is concerned.

358 U.S. at 513 (emphasis added). The Court’s em-

phasis on “nondiscriminatory” denial of benefits

clearly distinguishes Cammarano from this case.

Cammarano and Speiser are therefore consistent in

requiring a strict standard of review for situations

in which the government grants tax exemptions

affecting First Amendment rights on a discrimina-

tory basis.

This court’s decisions explicitly adopt this reading

of the relationship between Speiser and Cammarano.

In “Americans United” Inc. v. Walters, 477 F.2d

1169, we held that the appellants’ claim that Section

501 (e) (3)’s lobbying restriction was unconstitution-

ally discriminatory raised a substantial constitu-

tional question:

Cammarano, while disposing of appellants’

claim that first amendment rights are violated

by the questioned statute, does not attempt to

deal with possible discriminatory conduct. .. .

Americans United, on the other hand, alleges

just that discriminatory conduct found lacking

in Cammarano. .. .

If discrimination exists here it relates to the

exercise of the most fundamental of rights, those

protected by the first amendment. This is

neither a frivolous challenge nor one which, as

of the writing of this opinion, has been fore-

closed by the Supreme Court.

Id. at 1182-83.“ See Big Mama Rag, Inc. v. United

States, 631 F.2d 1030, 1034 & n.7 (D.C. Cir. 1980) ;

Haswell v. United States, 500 F.2d 1133, 1147-48

(Ct. Cl. 1974), cert. denied, 419 U.S. 1107 (1975).

Similarly, in Community-Service Broadcasting of

Mid-America, Inc. v. FCC, 593 F.2d 1102 (D.C. Cir.

1978) (en banc), this court invalidated a require-

ment that noncommercial educational stations record

and maintain copies of broadcasts on issues of public

importance because

where noncontest-based distinctions are drawn

in a statute affecting First Amendment rights,

the Supreme Court has held that the government

interest served must be “substantial” and the

statutory classification “narrowly tailored” to

serve that interest if the statute is to withstand

equal protection scrutiny.

Id. at 1122; see id. at 1111.

The case before us arguably differs from Commu-

nity Service and even Speiser in the sense that it in-

volves unequal levels of governmental subsidy of

First Amendment rights, rather than a more intru-

sive governmental restriction of those rights. The

question apparently remains open whether courts

may adopt a different level of scrutiny in cases of

*5 It should be noted, however, that appellant in “Americans

United” dropped its First Amendment claims on appeal. See

477 F.2d at 1181 (“at oral argument and in its Reply Brief it

has narrowed its focus, and we believe wisely so, to the ‘dis-

criminatory’ aspects of § 501 (e) (3)”).

40a

this sort, one that is somewhat less searching than

the scrutiny applied when the government directly

bans First Amendment expression. See Perry Local

Educators’ Ass’n v. Hohlt, 652 F.2d 1286, 1296-97

(7th Cir. 1981) (suggesting existence of sliding scale

that “may vary with the particular right in ques-

tion”). It is not necessary to decide whether, in view

of the nature of the inhibition of Taxation’s First

Amendment rights, the appropriate level of review

is the most stringent courts employ. It is certainly

inadequate simply to ask whether the classifications

at issue in this case “bear some rational relationship

to a legitimate state end.” McDonald v. Board of

Election Commissioners, 394 U.S. 802, 809 (1969).

Plainly, this case is not like Cammarano, in which

the indirect burdens on First Amendment expression

fell equally on all. Only a heightened scrutiny test

fully accords with decisions in other cases.“ Indeed,

26 Judge Wisdom’s comments in Perry Local Educators’

Ass'n v. Hohit, 652 F.2d 1286 (7th Cir. 1981), which con-

cerned an analogous equal-acvess claim by a union to use a

school board’s internal mail system already being used by

another union, are instructive:

Despite the sweeping language of Mosley quoted above,

other Supreme Court cases demonstrate that it is not

invariably true that the government may never discrimi-

nate among constitutionally protected speech on the basis

of its content or on the basis of the speaker, nor even

that all such discrimination must always be scrutinized

with equal strictness. Because a majority of the Court

were unable to agree on any one rationale in some of

these cases, it is not always easy to determine the appro-

priate standard of review. Even interpreting the cases

in the way most favorable to the defendants, however,

they require rigorous scrutiny to be applied here

[S]peech restrictions keyed to the identity of the speaker

are always scrutinized strictly: they almost invariably

4la

our analysis must be guided by Buckley v. Valeo, 424

U.S. 1 (1976), in which the Supreme Court heard

challenges to public financing provisions for presi-

dential campaigns that provided far greater financial

support to major-party candidates. In determining

the standard of review appropriate under the Fifth

Amendment, the Court started from precedents hold-

ing that direct “restrictions on access to the electoral

process must survive exacting scrutiny.” Id. at 94.

See, e.g., Lubin v. Panish, 415 U.S. 709, 718 (1974)

(indigent candidates may not be required to pay fil-

are not neutral with respect to the viewpoints they tend

to disfavor.

Id. at 1294-95. National Black United Fund, Inc. v. Devine,

No. 80-2101 (D.C. Cir. Oct. 20, 1981), which rejected a claim

that refusal to allow participation in the Combined Federal

Campaign by a nonqualifying charity abridged appellant’s

First Amendment rights, is not to the contrary. The opinion

observed that the mere “possibility” that the voices of some

charities might be amplified at the expense of others did not

“compel strict scrutiny of every Commission decision,” slip

op. at 12, because the regulations at issue were “intended to

serve interests unrelated to the suppression of speech” and

were thus subject to evaluation under a different standard.

Id. at 18. By contrast, the Section 501(c) lobbying restriction

clearly was intended to regulate speech. “A rule that sub-

stantially impairs the ability of certain groups to convey their

message to a desired audience, on the other hand, effectively

‘abridges speech’ even if it is not intended to curtail public

debate. . . Government must bear a far heavier burden of

justification for such a rule. Its content-neutral interests must

be compelling’ and it must demonstrate the absence of any

‘less drastic means’ for achieving its purpose.” Jd. In the case

now before us, even the government acknowledges that “[t]he

democratic process as a whole is jeopardized where the gov-

ernment provides undue support to any one lobbying faction,

including the class of charitable organizations.” IRS Brief at

29.

42a

ing fees absent alternative means of ballot access) ;

Williams v. Rhodes, 393 U.S. 23, 31 (1968) (appear-

ance of minor parties on ballot may not be condi-

tioned on whether they can obtain voter petitions

with signatures totaling 15 percent of the number

of ballots cast in the previous gubernatorial elec-

tion). These “direct burdens” were much more re-

strictive than discriminatory funding of presidential

candidates, the Court said, thereby implying that less

than “exacting scrutiny” was appropriate. Id. But

it is highly significant that the Court went on to

analyze the discriminatory funding provisions in

heightened scrutiny terms. “In any event, Congress

enacted Subtitle H in furtherance of sufficiently im-

portant governmental interests,” id. at 95, because

“public financing as a means of eliminating the im-

proper influence of large private contributions fur-

thers a significant governmental interest.” Id. at 96

(emphasis added). The standard of review we select

in this case must be no lower than that applied in

Buckley, even though neither situation involves a

“direct burden” on First Amendment expression.”

27 Buckley is directly analogous to this case because Con-

gress had approved greater public funding of First Amend-

ment activities for some candidates as opposed to others.

Buckley is also distinguishable, however, in the sense that it

involved less restrictive discriminations than those at issue

here. The Court noted that correlative restrictions on major-

party candidates helped offset the lack of full financing given

to minor parties: “But since any major-party candidate

accepting public financing of a campaign voluntarily assents

to a spending ceiling, other candidates will be able to spend

more in relation to the major-party candidates.” 424 U.S. at

99. No such offsetting advantages in Section 501 for charita-

ble groups have been suggested here. The Court also observed

in Buckley that the “risk of harm to minority interests is

speculative” because the statute had yet to go into force, id.

at 101, and cautioned that “we of course do not rule out the

43a

Cf. Citizens Against Rent Control/Coalition for Fair

Housing v. Berkeley, —— U.S. ——, 50 U.S.L.W.

4071, 4072 (1981) (“regulation of First Amendment

rights is always subject to exacting judicial re-

view.“).

In short, we must apply a heightened level of seru-

tiny to the discriminatory treatment of lobbying ac-

tivities given by Section 501(c) to different tax-

exempt groups. It may be true that “in taxation,

even more than in other fields, legislatures possess

the greatest freedom in classification,” Madden v.

Kentucky, 309 U.S. 83, 88 (1940), but that power is

not unlimited.” As the Supreme Court held in Police

possibility of concluding in some future case, upon an appro-

priate factual demonstration, that the public financing system

invidiously discriminates against nonmajor parties.“ Id. at

97 n.131. Again, in contrast, the Section 501(c) (3) restric-

tion on lobbying by charitable organizations has been in effect

since 1934.

28 The government argues that no Supreme Court cases

have ever held that classifications in federal tax statutes are

to be measured by more than a rational basis standard, IRS

Supp. Brief at 30, and that it knows of no Supreme Court

cases holding a federal tax statute invalid on equal protection

grounds, id. at 31. See San Antonio Independent School Dist.

v. Rodriguez, 411 U.S. 1, 41 (1973) (quoting Madden v. Ken-

tucky) ; Lenhausen v. Lake Shore Auto Parts Co., 410 US.

356, 360 (1973) (tax statute must be “palpably arbitrary” or

“invidious” to violate equal protection guarantees). These

cases do not involve First Amendment claims, however, which

must be measured under a more searching standard. Speiser

v. Randall, 357 U.S. at 518.

Federal tax statu es have been overturned, however—by

the Supreme Court as well as lower federal courts. E.., Na-

tional Life Ins. Co. v. United States, 277 U.S. 508, 520 (1928)

(“The suggestion that as Congress may or may not grant

deductions from gross income at pleasure, it can deny to one

and give to another is specious, but unsound”); id. at 534

44a

Dep't v. Mosley, 408 U.S. 92, 99 (1972), there is a

profound constitutional distinction between regulat-

ing all picketing and doing so selectively. “Because

(Brandeis, J., dissenting) (“The Court has, of course, power

to declare that the system of taxation established by Congress

is unconstitutional”) ; Moritz v. Commissioner, 469 F.2d 466

(10th Cir. 1972), cert. denied, 412 U.S. 906 (1973) (depend-

ent care deduction provision of Code impermissibly distin-

guished between unmarried male and unmarried female tax-

payers); cf. Golden Rule Church Ass'n, 41 T.C. 719, 729

(1964) (“Although tax benefits may be matters of legislative

grace... nevertheless, a denial of such benefits granted to

- others of essentially the same class may well rise to the level

of an unconstitutional discrimination”). Moreover, state tax

classifications have been struck down for incompatibility with

equal protection principles. E. g., lowa-Des Moines National

Bank v. Bennett, 284 U.S. 289 (1981); cf. In re Estate of

Legatos, 1 Cal. App.3d 657, 81 Cal. Rptr. 910 (1969) (equal

protection proscribes arbitrary tax classifications). In addi-

tion, despite popular conceptions, Social Security is more

akin to a tax than an insurance payment. See Califano v.

Goldfarb, 430 U.S. 199, 217-18 (1977) (Stevens, J., concur-

ring in judgment). The Supreme Court, applying an elevated

but not its most stringent standard of review, has found cer-

tain gender-based classifications in the Social Security Act

unconstitutional. See Weinberger v. Wiesenfeld, 420 U.S. 636

(1975) ; Califano v. Goldfarb, supra. See generally Van Al-

styne, The Demise of the Right-Privilege Distinction in Con-

stitutional Law, 81 Harv. L. REV. 1489, 1461 (1968) (“A

minimum demand of uniformly reasonable rules in the man-

agement of public largesse is purely an unexceptional require-

ment of constitutional government”).

The government suggests that Moritz is a case “of question-

able vitality” in light of Kahn v. Shevin, 416 U.S. 351, 355

(1974), in which the Supreme Court held that Florida could

provide a property tax exemption for widows but not for

widowers without violating equal protection guarantees. IRS

Supp. Brief at 31 n.25. The two cases are clearly distinguish-

able, however, and even in Kahn the statute was upheld after

a level of review showing that the differential treatment had

45a

picketing plainly involves expressive conduct within

the protection of the First Amendment, . . discrim-

inations among pickets must be tailored to serve a

substantial governmental interest.” See Carey v.

Brown, 447 U.S. 455, 471 (1980) (reaffirming Mos-

ley) ; California v. LaRue, 409 U.S. 109, 138 (1972)

(Marshall, J., dissenting). The issue in this case

therefore becomes whether the discriminatory frame-

work of Section 501 (e) serves a bstantial govern-

mental interest and whether the statute is narrowly

tailored to serve that end.

“a fair and substantial relation to the object of the legisla-

tion.” Id. at 355 (quoting Reed.v. Reed, 404 U.S. 71, 76

(1971) )

It is true that almost three decades ago, this court applied

a rational basis test in upholding provisions of the Subversive

Activities Control Act that denied tax exemptions or deduc-

tibility of contributions to any communist-action organization,

regardless of its status under I.R.C. §§ 170 and 501.

The sanctions with reference to tax exemptions and de-

ductions, which are in Section 11 of the Act, forbid income

tax deductions for contributions to a registered organiza-

tion and deny income tax exemptions to such organiza-

tions. These allowances and denials fall within the field

of congressional grace so long as a reasonable basis ap-

pears. This is too well established to require citation. We

think these provisions clearly valid.

Communist Party of the United States v. Subversive Activi-

ties Control Board, 223 F.2d 531, 557 (D.C. Cir. 1954), rev’d

on other grounds, 351 U.S. 115 (1956). But this case is of

doubtful authority in view of Speiser v. Randall, which was

decided four years later. Compare Seasongood v. Commis-

sioner, 227 F.2d 907, 911 (6th Cir. 1955) (construing “propa-

ganda” to reach only coloring or distortion of facts with an

ulterior motive, and holding that a Good Government League

was not disqualified from receiving deductible contributions

because a different construction might violate First Amend-

ment).

46a

III. CONSTITUTIONALITY OF DIFFERENTIAL TAX

TREATMENT OF LOBBYING

When Cammarano v. United States was decided in

1959, its foundation was the congressional “neutral-

ity” toward lobbying that existed at the time of the

decison. See 358 U.S. at 513.“ Since that time, Con-

gress has departed substantially from the policy that

government should not subsidize any lobbying. Taxa-

tion claims that the refusal to subsidize lobbying Sec-

tion 501 (e) (3) organizations to the same extent that

lobbying by other Section 501 (e) organizations is

subsidized constitutes a violation of equal protection.

On these facts, we agree. In the starkest terms,

Congress has used the Code, perhaps inadvertently,

to do one of two things. If veterans’ organizations

and organizations such as Taxation lobby on differ-

ent sides of the same questions, Congress has chosen

to favor one lobbyist on a particular issue over an-

other. If veterans’ organizations and Section

501(c)(3) organizations lobby on entirely distinct

matters, Congress has ensured that greater attention

will be devoted to some causes than others. Either

outcome is unconstitutional unless an evaluation of

the differential treatment in terms of the heightened

level of scrutiny appropriate here demonstrates that

there is an important governmental interest justify-

2° Indeed, the IRS in Cammarano argued against a business

deduction for lobbying expenses on the ground that it “would

upset the tax equilibrium which existed due to the then exist-

ing uniform prohibition against subvention.“ Garrett, Federal

Tax Limitations on Political Activities of Public Interest and

Educational Organizations, 59 Gro. L.J. 561, 583 & n.38

(1971) (citing Brief for Respondents at 12, Cammarano v.

United States, 358 U.S. 498 (1959) ).

47a

ing the First Amendment preference. We turn to

that question now.

A. State Interests Furthered by the Classification

Before the court can determine whether a substan-

tial governmental interest supports the differential

classification under review, it must first determine

what interests are said to justify the classifications.

Once these interests are identified, it can then be

asked whether they are substantial. The pertinent

classifications made in the Code are as follows.

1. Business lobbying

On rehearing, Taxation has dropped its equal pro-

tection challenge to the right of businesses to deduct

lobbying expenses, Taxation Supp. Brief at 18 n.3,

and it has not hitherto been necessary to explain

these provisions of the Code. Nevertheless, the tax

treatment of business lobbying is worthy of some

attention because the reasons behind that treatment

exemplify the sorts of governmental interests that

we seek to idenify in this section of the opinion.

I. R. C. § 162 (e) permits the deduction of all “ordi-

nary and necessary expenses” incurred in carrying

on any trade or business, including lobbying costs in-

curred in “direct connection” with “legislation or

proposed legislation of direct interest to the tax-

payer.” There is a significant difference between

profitmaking and nonprofitmaking entities, and it

seems probable that each type lobbies with different

% See note 9 supra. Section 162 (e) also permits businesses

to deduct indirect lobbying expenditures that are paid as dues

to an organization of which the taxpayer is a member, such

as a trade association.

48a

motives. See Haswell v. United States, 500 F.2d at

1150. But the fact that a difference exists does not

by itself demonstrate the state interest behind the

distinction.

The Senate Report explaining the addition of Sec-

tion 162(e) in 1962 mentions several policy consid-

erations, however. Lobbying is a cost of doing bus-

iness, and the deduction of lobbying expenses permits

a more accurate measurement of a business’ net in-

come. SEN. REP. No. 1881, 87th Cong., 2d Sess.

22-23 (1962), reprinted in [1962] U.S. CopE Conc.

& Ab. NEws 3304, 3325. The Report mentions three

other explanations: the anomaly of allowing deduc-

tions for expenses incurred in presenting a business’

viewpoint to administrative agencies and the execu-

tive branch but excluding the legislative branch; the

importance of some legislation to a business’ con-

tinued existence;and the desirability of encouraging

business people to bring relevant information to the

attention of the Congress. /d.

2. Veterans’ organizations

It is far more difficult to identify the governmen-

tal interest that is promoted by giving veterans’

organizations a lobbying advantage over other Sec-

tion 501(c) organizations. Just as there are differ-

ences between business and nonbusiness groups, of

course, veterans groups may be distinguished from

other Section 501(c) organizations. As noted above,

however, the mere fact that differences exist between

any two distinct entities does not demonstrate a sub-

stantial state interest that can justify discrimination

in the exercise of constitutional rights. Descriptive

terms alone have little relevance in identifying the

governmental interest furthered by a differential stat-

utory classification.

49a

The government offers only two state interests that

are said to justify preferential tax treatment of lob-

bying by veterans’ organizations. First, veterans de-

serve substantial benefits and rewards in return for

their service to the country. These benefits “compen-

sate them for disruption of civilian pursuits,” assist

in the “readjustment to civilian life,” and help “make

military service more attractive.” IRS Supp. Brief at

44. Second, the government suggests that legislative

activity by veterans’ organizations is necessary in

order to protect veterans’ benefits from subversion by

hostile forces. “Since these benefits are provided by

legislatures, it is reasonable for Congress to allow

veterans’ organizations to engage in lobbying activi-

ties to preserve their benefits without risk of losing

their tax deductible contributions.” Id.

In identifying the government interests fur-

thered by the tax treatment of these groups, how-

ever, it must be cautioned that our effort risks be-

coming a post hoc attempt to rationalize an otherwise

inexplicable distinction in the Code. The government

made no attempt in the district court to present affi-

davits or other evidentiary materials. Our identifica-

tion of the relevant state interests must depend on

the legislative history of the statute—but that his-

tory is sparse indeed.“ Despite the apparently un-

n See, e.g., Memorandum in Support of Cross-Motion by

Defendants for Summary Judgment, October 28, 1978, at 5

(legislative history is “surprisingly sparse“); Garrett, supra

note 29, at 564 (“The statutory history of this amendment is

unclear as to the underlying rationale and scope of the pro-

hibition”) ; Troyer, supra note 22, at 1421 (legislative history

of the 1934 amendment “is sparse and unclear); Note, Regu-

lating the Political Activity of Foundations, 83 Harv. L. REV.

1843, 1845 (1970) (“neither the extent of the proscription

nor its rationale has ever been clearly enunciated by Con-

gress”).

ambiguous distinction drawn in the statute, there

is no indication in the legislative history of these

sections that Congress intended to grant any tax-

exempt organization a lobbying advantage over any

others. In fact, the scant legislative history that

exists is to the contrary, and suggests that Congress

meant to treat the lobbying of all § 501 (e) organiza-

tions equally.

Tax exemptions for religious, charitable, and edu-

cational organizations—and the correlative provisions

permitting taxpayers to deduct their contributions

to such groups—are much older than similar treat-

ment of veterans’ organizations. Not until after

World War One did Congress explicitly extend these

benefits to a named veterans’ group. Section 214(a)

of the Revenue Act of 1921, ch. 136, 42 Stat. 227,

accorded exempt status to posts of the American

Legion, and it is greatly suggestive that Congress

in 1921 viewed the American Legion no differently

than any other charitable group. Senator Lodge,

who proposed the extension in the Senate, consid-

ered it one “to which I think there can be no possible

objection,” 61 Conc. Rec. 7066 (1921), and the lack

of debate bears him out. As enacted, the predecessor

section to I. R. C. § 170 simply added the American

Legion to other organizations, by allowing deductions

for

Contributions or gifts made within the taxable

year to or for the use of: (A) The United

States, any State, Territory, or any political

subdivision thereof, or the District of Columbia,

for exclusively public purposes; (B) any corpo-

ration, or community chest, fund, or foundation,

organized and operated exclusively for religious,

charitable, scientific, literary, or educational

5la

purposes, including posts of the American

Legion or the women’s auwiliary units thereof,

or for the prevention of cruelty to children or

animals, no part of the net earnings of which

inures to the benefit of any private stockholder

or individual; or (C) the special fund for voca-

tional rehabilitation authorized by section 7 of

the Vocational Rehabilitation Act.

Section 214(a)(11), 42 Stat. 241 (embphasis

added). In the beginning, then, Congress not only

expected that veterans’ organizations and charitable

groups would be treated equally, but it included both

groups in the same subsection of the tax laws.

Congress extended this tax treatment to veter-

ans’ organizations generally in 1924. Section

214(a) (10), Revenue Act of 1924, ch. 234, 43 Stat.

253. By this time, however, the statute had become

considerably more detailed, and Congress created a

new subsection for the veterans’ groups. Contribu-

tions or gifts were deductible if given to

(A) The United States, any State, Territory, or

any political subdivision thereof, or the District

of Columbia, for exclusively public purposes;

(B) any corporation, or community chest, fund,

or foundation, organized and operated exclu-

sively for religious, charitable, scientific, liter-

ary, or educational purposes, or for the preven-

tion of cruelty to children or animals, no part of

the net earnings of which inures to the benefit

of any private shareholder or individual; (C)

the special fund for vocational rehabilitation au-

thorized by section 7 of the Vocational Rehabili-

tation Act; (D) posts or organizations of war

veterans, or auxiliary units or societies of any

52a

such posts or organizations, if such posts, organ-

izations, units, or societies are organized in the

United States or any of its possessions, and if no

part of their net earnings inures to the benefit of

any private shareholder or individual; or (E) a

fraternal society, order, or association, operat-

ing under the lodge system, but only if such con-

tributions or gifts are to be used exclusively for

religious, charitable, scientific, literary, or edu-

cational purposes, or for the prevention of

cruelty to children or animals.

Section 214 (a) (10), 43 Stat. 271. Again, however,

the legislative history creates no inference that Con-

gress sought to treat these groups differently than

charitable organizations. The change was approved

without comment on the floor in either house, see 65

Conc. REC. 2860, 7126 (1924), and received almost

no mention in the reports accompanying the revenue

act. See S. Rep. No. 398, 68th Cong., Ist Sess. 24

(1924); H.R. Rep. No. 844, 68th Cong., Ist Sess. 18

(1924). It is also noteworthy that Congress enacted

the same restrictions concerning earnings that inured

to the benefit of private individuals for both types of

organizations.

The lobbying limitation on charitable organizations

was not enacted until 1934, and it is true that Con-

gress inserted it only in the subsection of the

statute dealing with charitable organizations. Sec-

tion 23(0)(2), Revenue Act of 1934, 48 Stat. 690.

This may simply have been a drafting oversight,

however. Indeed, Senator Harrison, the chairman of

the reporting committee, suggested that a more care-

fully drafted amendment would apply to “war organ-

izations” as well:

53a

In considering that amendment, as I recall,

the sentiment of the committee was that the

provision should apply to any organization that

is receiving contributions, the proceeds of which

are to be used for propaganda purposes or to try

to influence legislation.

I called the attention of the experts to the fact

that it seemed to me the proviso at the end of

the second paragraph [the lobbying provision]

should apply to all four paragraphs. Of course,

that would affect some war organizations, but

personally I see no difference between one organ-

ization that might be on one side of the fence

getting contributions to propagandize and influ-

ence legislation and being permitted to proceed

without interference, while at the same time

preventing one that might have a different view-

point from receiving or making use of contribu-

tions for the same purpose.

78 ConG. Rec. 5861 (1934) (emphasis added). Sena-

tor LaFollette, another member of the Senate Finance

Committee, agreed to the desirability of uniformity:

I recognize . . . that there are certain types of

organizations to which Congress and the execu-

tive branch of the Government might desire to

encourage contributions. . In my opinion, it

will not make a penny’s worth of difference, so

far as the contributions to these various or-

ganizations are concerned, if they are all ex-

cluded from this immunity and all treated alike.

It is my judgment that we never shall get away

from mistakes of administration and from deci-

sions which may seem like favoritism until all

contributions to organizations of this kind are

made subject to the income tax.

54a

Id. at 5959. See id. at 5861 (Senator Reed) (stating

“no disagreement” with Senator Harrison’s remarks).

The amendment was eventually agreed to with the

understanding that it would undergo redrafting by

the conference committee. See 78 CoNnG. Rec. 5959

(Senator Couzens) (amendment should “go to con-

ference, and we can change the language if it is

found to do any inequity”); id. (Senator Reed) (“if

the amendment shall be agreed to we will have from

now until the conference to study the subject and

prepare better phraseology”). There is no explana-

tion in the legislative history for the fact that the

language of the enacted version was identical to

that of the amendment as proposed.”

Congress has not indicated since 1934 that it spe-

cifically wishes to impose the lobbying restriction less

than uniformly, other than by enacting a Code that

articulates lobbying limitations in some provisions

and not others. No stated intent to discriminate

among the lobbying activities of various tax-exempt

organizations is shown by the 1972 addition of Sec-

tion 501 (e) (19), which created a new subsection for

veterans’ organizations in Section 501 to correspond

2 The legislative scheme provides further support for this

broad reading of the scope of the 1934 lobbying restriction.

when the limitation was enacted, it was added to all relevant

portions of the Code—the section establishing an exemption

for charitable organizations and the three provisions permit-

ting deduction of charitable contributions for income, estate,

and gift tax purposes. See Revenue Act of 1934, Pub. L. No.

73-216, §§ 101 (6), 23 (o) (2), 406, 517, 48 Stat. 700, 690, 755,

760 (current version at I. R. C. §§ 501 (e) (3), 170(c) (2) (D),

2055 (a) (2), 2522 (a) (2)). There was no intent —and no con-

ceivable reason— to apply the lobbying restriction to some,

but not all, of the primary tax benefits accorded exempt

organizations.

55a

with the separate veterans’ subsection in Section 170.

The legislative history suggests that this addition

was only a technical, nonsubstantive amendment de-

signed to correct the tax treatment of certain income

by veterans’ organizations inadvertently changed by

the Tax Reform Act of 1969.“ There is no indication

that Congress meant to benefit veterans’ organiza-

tions vis-a-vis other tax exempt organizations in any

respect.“ Most importantly, in explaining the effect

of the new provision the Senate Report noted: “The

committee does not intend for any expenditures for

2 Until 1972, veterans’ organizations were themselves ex-

empt from taxation either as social welfare organizations

under Section 501(c) (4) or as social clubs under Section 501

(c) (7). Until 1969, organizations exempt under these cate-

gories were not subject to the unrelated business income tax.

The Tax Reform Act of 1969 extended the unrelated business

income tax to these categories, however. The 1972 law there-

fore created a new subsection for veterans’ organizations, and

added Section 512(a) (4) so that the income that a veterans’

organization received from insuring its members and their

dependents was not subject to the unrelated business income

tax. See S. Rep. No. 1082, 92d Cong., 2d Sess. (1972); H.R.

REP. No. 851, 92d Cong., 2d Sess. (1972).

* The 1969 extension of the unrelated business income tax,

for example, had been prompted by a desire “to avoid unequal

treatment of the various types of tax-exempt organizations.”

H.R. Rep. No. 413, pt. 1, 91st Cong., Ist Sess. 44 (1969)

(amending I.R.C. § 511 (a) (2) (A)). The 1972 revision was

based on a similar concern. See 118 CoNnG. REc. 6033 (1972)

(Rep. Mills) (“the veterans’ organizations should not be

taxed on this insurance income since other exempt organiza-

tions are permitted to insure their members without being

taxed on the income from this activity“); id. (Rep. Matsu-

naga) (bill “would place veterans’ organizations in exactly

the same tax position as fraternal beneficiary associations

now enjoy”).

56a

lobbying purposes to come under this exception.” S.

REP. No. 1082, 92d Cong., 2d Sess. 5 (1972), re-

printed in [1972] U.S. Cop—E Cone. & Ab. NEws

3141, 3145.“ It is therefore difficult to resist the

conclusion that the tax preferences for lobbying by

veterans’ organizations reflect no policy, but simple

lack of attention and consistency on the part of Con-

gress and the IRS.

3. Section 501(c)($) charitable organizations

In addition to searching for the governmental

interests promoted by preferential treatment of lobby-

ing by veterans’ organizations, we must also examine

the governmental interests behind restrictive treat-

ment of lobbying by charitable groups and other Sec-

tion 501(c)(3) organizations. As the government

emphasizes, Congress, when it does not impinge im-

permissibly upon fundamental rights, “may address

The government argues that this language modifies only

income received from insurance activities and set aside for

charitable purposes under Section 512(a). IRS Supp. Brief at

38 n. 33. Even if this reading is correct, great weight should

still be given to the restriction. The new rule excluded from

the unrelated business income tax all insurance receipts used

or set aside for insurance benefits “or for religious, charitable,

scientific, literary, educational, etc., purposes” that were then

identified as “the purposes specified in sec. 170 (e) (4).“ S.

REP. No. 1082, at 5. These purposes, the Report said,

are to include programs involving Americanism, youth

activities, community activities, and information and

educational programs relative to national security and

foreign affairs for purposes of this provision.

Id. If these “purposes specified in sec. 170 (e) (4)” do not

include lobbying when income is derived from one source, it

is hard to see how they can in- de lobbying simply because

income is derived from a different source.

57a

a problem ‘one step at a time.’” IRS Supp. Brief

at 40 (quoting Jefferson v. Hackney, 406 U.S. 535,

546 (1972)). “[T]he Constitution permits Congress

to single out the greatest problems and legislate re-

specting the most serious abuses, while leaving less

serious problems to a later date.” IRS Supp. Brief at

42. See Buckley v. Valeo, 424 U.S. at 105; Katzen-

bach v. Morgan, 384 U.S. 641, 657 (1966). If the

legislative history demonstrates a compelling reason

for Congress to focus with particularity on special

problems created by charitable lobbying with tax-

deductible dollars, this might suffice to justify the

differential treatment indicated in the Code sections

before us.

Initially, it does seem far easier to discern the

governmental interests promoted by the lobbying re-

striction on charitable organizations than those ad-

vanced by not extending this restriction to veterans’

groups. Federal tax exemptions for religious, chari-

table, and educational organizations are as old as the

Income Tax Act of 1894,“ but there were no statu-

tory limitations on the lobbying activities of exempt

organizations for the next forty years. As described

above, Congress amended the tax laws in 1934 to

make clear that what are now Section 501(c) (3)

organizations were not to engage in substantial lobby-

ing activities. Unlike the legislation concerning vet-

erans’ organizations, the lobbying restriction was

% Act of August 27, 1894, ch. 349, 28 Stat. 509 (held uncon-

stitutional in Pollock v. Farmers’ Loan & Trust Co., 158 U.S.

601 (1895)). A similar exemption provision was included in

the Income Tax Act of 1913, ch. 16, 38 Stat. 114, and subse-

quent revenue acts. The correlative provision permitting tax-

payers to deduct contributions from their income taxes was

enacted in 1917. War Revenue Act, ch. 63, 40 Stat. 297, 330

(now I.R.C. § 170).

58a

enacted only after a number of explanatory remarks

by members of Congress, and this makes it seem

relatively easy to identify the governmental interests

promoted by the measure.

In discussing the amendment on the floor of the

Senate, for example, Senator Harrison explained:

the attention of the Senate committee was called

to ‘the fact that there are certain organizations

which are receiving contributions in order to in-

fluence legislation and carry on propaganda. The

committee thought there ought to be an amend-

ment which would stop that, so that is why we

have put this amendment in the bill.

78 ConG. REC. 5959 (1934). Senator Reed, who was

also a member of the reporting committee, addressed

what we were trying to do by this amendment.

There is no reason in the world why a contribu-

tion made to the National Economy League

should be deductible as if it were a charitable

contribution if it is a selfish one made to advance

the personal interests of the giver of the money

Id. at 5861. These statements suggest that Congress

acted to curb what is regarded as abuses by Section

501(c)(3) organizations then eligible to use tax-

deductible contributions for lobbying activities. Based

partly em these comments, the district court below

articulated three “legitimate governmental purposes”

served by the lobbying restriction: “assurance of

governmental neutrality with respect to the lobbying

activities of charitable organizations; prevention of

abuse of charitable lobbying by private interests; and

preservation of a balance between the lobbying ac-

tivities of charitable organizations and those of non-

59a

charitable organizations and individuals.” Memo-

randum Order, J.A. 62.

It would be grossly simplistic to read too much into

these comments, however. Legislation is never passed

in a vacuum, and any genuine understanding of its

purpose must make some account of what conditions

were before it was enacted. There is an early history

of restrictions on political activity by charitable or-

ganizations well preceding the 1934 statutory change.

In 1919, for example, the Treasury provided by

regulation that “associations formed to disseminate

controversial or partisan propaganda are not educa-

tional within the meaning of the statute.” Treas.

Reg. 45, art. 517 (1919), in T.D. 2831, 21 TREAS.

Decs. INT. Rev. 285 (1920). The principle was

successfully applied in several cases before the Board

of Tax Appeals in the 19208,“ and was central to

Judge Learned Hand’s opinion in Slee v. Commis-

sioner, 42 F.2d 184 (2d Cir. 1930):

Political agitation as such is outside the statute,

however innocent the aim, though it adds nothing

87 See, e.g., Herbert E. Fales, 9 B.T.A. 828 (1927) (evidence

indicated that Scientific Temperance Federation, Massachu-

setts Anti-Saloon League, Massachusetts Anti-Cigarette

League, and International Reform Bureau were formed to

disseminate controversial propaganda); Sophia G. Coxe, 5

B.T.A. 261 (1926) (League to Enforce Peace not exclusively

charitable). See generally Jackson v. Phillips, 96 Mass. (14

Allen) 539 (1867) (trust to promote “women’s rights” not

charitable) ; Bowditch v. Attorney General, 241 Mass. 168,

134 N.E. 796 (1922) (trust for promotion of temperance held

charitable). The later case of Slee v. Commissioner, 42 F.2d

184 (2d Cir. 1930), was widely followed. E. g., James J.

Forstall, 29 B.T.A. 428, 436 (1933) ; Leubuscher v. Commis-

sioner, 54 F.2d 998, 1000 (2d Cir. 1932); Weyl v. Commis-

sioner, 48 F.2d 811, 812 (2d Cir. 1931).

60a

to dub it “propaganda,” a polemical word used

to decry the publicity of the other side. Contro-

versies of that sort must be conducted without

public subvention; the Treasury stands aside

from them.

Id. at 185. Obviously, because of the close connection

in the statute between veterans’ organizations and

other charitable groups, the regulations and judicial

pronouncements presumably applied to veterans’ or-

ganizations too.

These restrictions on political activity by charitable

organizations prior to 1934 make it difficult to inter-

pret the congressional intent behind the 1934 amend-

ment with total confidence. “In view of the existing

case law on the subject, it is not clear what the

proponents of the legislation sought to accomplish.”

Clark, The Limitation on Political Activities: A Dis-

cordant Note in the Law of Charities, 46 Va. L. REv.

439, 447 (1960). The addition to the statute may

have been meant simply to codify preexisting regula-

tion of charitable organizations. To a great extent,

however, commentators hold the view that the 1934

enactment was a reform measure intended to liberal-

ize the case law.“ It appears that the proponents

38 See, e.g., Seasongood v. Commissioner, 227 F.2d 907, 910

(6th Cir. 1955) (courts “have also applied the principle, that

the section being remedial must be liberally construed“);

Clark, supra note 12, at 447; Borod, supra note 22. at 1113

(1934 amendments “were intended to some extent to liberalize,

rather than restrict, the administration of the revenue laws

in regard to charitable organizations”); Caplin & Timbie,

supra note 6, at 185 (“A persuasive case can be made” that

“Congress intended a more limited proscription than a literal

reading of the statute would suggest”). The restriction has

been widely excoriated. E.g., Note, The Tax Code’s Differ-

ential Treatment of Lobbying Under Section 501(c)(3), 66

6la

wanted to restrict selfishly motivated political agita-

tion, meant to secure some personal interests of the

donor, without providing that all political activity by

charitable organizations was inherently improper.

The breadth of the lobbying restriction has therefore

been attributed primarily to the inability of Congress

to draft a more “appropriate” test.“ This theory

finds support in the debates. Senator Reed, who was

also a member of the Senate Finance Committee, ob-

served on the floor that “we found great difficulty in

phrasing the amendment. I do not reproach the

draftsmen. I think we gave them an impossible task;

but this amendment goes much further than the

committee intended to go.” 78 CoNnG. REC. 5861

(1934).

Whatever the strength of these views, they strongly

suggest that the 1934 amendment applying only to

charitable organizations cannot automatically be pre-

sumed to show that Congress addressed only “the

phase of the problem which seem[ed] most acute to

the legislative mind.” Williamson v. Lee Optical Co.,

348 U.S. 483, 489 (1955). If the 1934 amendment

was intended to liberalize the case law, the fact that

it applied only to charitable organizations would

suggest that Congress meant to treat lobbying by

such groups less stringently than similar activity by

Va. L. REv. 1513, 1525 (1980); Note, Political Activity and

Tax Exempt Organizations Before and After the Taz Re-

form Act of 1969, 38 Geo. WASH. L. REV. 114, 1136 (1970)

(restriction is “obscure in origin, uncertain in application, and

perhaps harmfully outmoded”).

Garrett, supra note 29, at 564; see Clark, supra note 12,

at 447.

other groups.” The legislative history provides no

positive assurance for this proposition, of course, but

it also fails utterly to demonstrate that Congress re-

stricted the lobbying of charitable organizations be-

cause of special problems arising in that area alone.

B. Substantiality of the State Interests

If there are any other governmental interests fur-

thered by disparate tax treatment of lobbying activi-

ties by tax-exempt organizations and other groups,

they have not been identified in the legislative history

or by the parties in this case. The question now be-

comes whether any of these interests are sufficiently

substantial to justify the differential tax treatment,

and if so whether the statute is narrowly tailored to

meet them. F

The preceding discussion clearly identified govern-

mental interests that justify allowing businesses to

deduct the cost of business lobbying. Because the gov-

ernment assesses taxes on net business income, such

deductions are necessary in order to permit accurate

measurement of the cost of producing goods and serv-

ices. In contrast, tax-exempt organizations have no

comparable need for a realistic reflection of income.

The governmental interest in distinguishing between

these two kinds of organizations is a substantial one,

% Some additional support for this argument may lie in the

enactment of Section 501(h) in 1976, see note 6 supra, which

liberalized the rules governing lobbying by charitable or-

ganizations by freeing them from the uncertain application

of the “substantiality” test. See Hearings on Legislative

Activity by Ceriain Types of Exempt Organizations Before

the House Comm. on Ways and Means. 92d Cong., 2d Sess. 1

(1972) ; Geske, Direct Lobbying Activities of Public Charities,

26 Tax LAWYER 305 (1972).

63a

and the Code’s differentiation between businesses and

Section 501 (e) (3) organizations is both relevant to

that interest and narrowly tailored to serve it.“

The addition of Section 162(e) has import in

assessing the strength of the government’s analysis

in this case, however, because it demonstrates that

lobbying is not an inherently improper activity con-

cerning which Congress seeks as much neutrality as

possible. Section 162(e) unquestionably demonstrates

a decision by Congress to depart from the posture of

neutrality toward lobbying that once was affirmed

by Cammarano.” It therefore undercuts any sugges-

*! The same reasoning supports the deductibility of con-

tributions to unions and business leagues under Sections

501 (e) (5) and 501 (e) (6). As noted above, such contributions

are deductible only to the extent they are “business expenses”

under Section 162. See note 9 supra.

It may be noted in passing, however, that some of the

governmental concerns articulated in the reports accompany-

ing the enactment of Section 162(e) are of doubtful constitu-

tional validity. Neither the importance of some legislation

to a business’ existence nor the desirability of encouraging

business people to bring relevant information to the attention

of Congress offers a clear and substantial justification for

subsidizing lobbying by particular groups over others. See

S. Rep. No. 1881 at 22-23, [1962] U.S. Cope Conc. & AD.

NEws at 3325.

See, e.g., Garrett, supra note 29, at 583 (“By reversing

the Supreme Court, the 1962 amendment to section 162(e)

indicates a changed congressional position on subvention,

makes defense of the policy difficult since it is no longer

uniformly applied, and raises serious first amendment issues

regarding whether the restrictions applied to section 501 (e)

(3) and 170 (e) (2) organizations operate discriminatorily

to suppress constitutional freedoms”) ; Influencing Legisla-

tion by Public Charities: Hearings Before the House Comm.

64a

tion that because efforts to influence legislation pre-

sent “well-recognized dangers to representative Gov-

ernment,” Haswell v. United States, 500 F.2d at 1150,

such efforts should never be subsidized through tax

deductions.“ The first of the three governmental

interests given by the district court for the restric-

tion on lobbying by charitable organizations—the

preservation of governmental neutrality concerning

lobbying—therefore disappears.

The second such interest, prevention of abuse of

charitable lobbying by private interests, also fails

to pass constitutional muster under a close scrutiny

test. There is no evidence whatsoever that the lobby-

ing of veterans is less subject to abuse by private

on Ways and Means, 94th Cong., 2d Sess. 68 (1974) (ABA

statement) :

[Nlow that direct business lobbying has become a de-

ductible activity under § 162(e), the former “neutral

posture of the tax law with respect to lobbying” (see

Cammarano v. United States, supra) has been upset in

favor of the business interests as opposed to the charitable

organizations.

The reports accompanying section 162(e) also suggest that

federal policy is not neutral, but is one of encouraging busi-

ness participation in the legislative process. S. Rep. No. 1881

at 23, [1962] U.S. Cope Conc. & Ap. News at 3325.

The Supreme Court has recognized that departures from

uniform pursuit of an asserted governmental purpose raise

doubts as to whether that purpose is genuinely important.

See, e.g., Metromedia, Inc. v. San Diego, —— U.S. ——, ——,

49 U.S.L.W. 4925, 4933 (1981) (“exceptions to the general

prohibition are of great significance in assessing the strength

of the city’s interest”) ; Schad v. Borough of Mount Ephraim,

— U.S. at ——., 49 U.S. L. W. at 4600 n.14 (“The Borough’s

decision to permit live entertainment as a nonconforming use

only undermines the Borough’s contention that live entertain-

ment poses inherent problems that justify its exclusion”).

65a

interests than that of other Section 501(c) groups.

Thus, although this interest is doubtless valid, it can-

not be suggested that Section 501(c) has been tailored

to meet it. We decline the government’s invitation

to infer that because Congress did not apply the

lobbying exemption to all exempt organizations, it

saw no problem in according special tax benefits to

veterans’ organizations despite their lobbying activi-

ties. The legislative history discussed above provides

no support for such an inference.

The final interest said to require special treatment

of lobbying by charitable organizations—‘“preserva-

tion of a balance between the lobbying activities of

charitable organizations” and those of other groups—

also fails to meet the heightened standard applicable

here. There is absolutely no evidence that Congress

sought to achieve this objective when it enacted the

lobbying restriction in 1934. Even if charities before

that time could lobby with deductible contributions,

there is no indication that charities had become so

powerful that they threatened to drown out the voices

of those whose lobbying was not similarly subsidized.“

“ Members of this court have suggested that in First

Amendment cases, judges should consider only the actual gov-

ernmental purposes behind challenged legislation rather than

possible or hypothetical ones. See, e.g., Community-Service

Broadcasting of Mid-America, Inc. v. FCC, 593 F.2d at 1128

(Robinson, J., concurring in part) (“courts cannot rely upon

aims that apparently never crossed the minds of the legisla-

tors, particularly when confronted by the possibility of danger

to a fundamental interest”) (footnote omitted) ; id. at 1146 &

n.51 (Leventhal, J., concurring) (“Courts engaged in the

careful scrutiny of legislation . are not free to conjecture

an important governmental interest when one has not sur-

faced in congressional deliberations.”). Cf. Califano v. Gold-

farb, 480 U.S. 199, 212-17 (1977) (plurality opinion) (ex-

66a

Moreover, had this been the intent of Congress,

courts would consider such a purpose constitutionally

illegitimate. “[W]here, as here, the legislature’s sup-

pression of speech suggests an attempt to give one

side of a debatable public question an advantage in

expressing its views to the people, the First Amend-

ment is plainly offended.” First National Bank of

Boston v. Bellotti, 435 U.S. 765, 785-86 (1978); see

id. at 790-91. “[T]he concept that government may

restrict the speech of some elements of our society

in order to enhance the relative voice of others is

wholly foreign to the First Amendment.” Buckley v.

Valeo, 424 U.S. at 48-49. The governmental pur-

poses said to require special restrictions on lobbying

by Section 501 (e) (3) organizations are therefore

either illegitimate, insubstantial, or inadequately pro-

moted by a statute that is not narrowly tailored to

serve them.

Moreover, the Code’s discriminatory treatment of

lobbying by veterans’ organizations does not even

satisfy the test of rationality, much less the height-

ened level of scrutiny appropriate here. The legisla-

tive history of the tax exemptions accorded veterans

demonstrates absolutely no governmental interest

whatsoever that is served by allowing such groups

to conduct substantial lobbying with tax-deductible

contributions. The post hoe rationales suggested by

the government are constitutionally illegitimate.

Allowing veterans to lobby freely in order to protect

their benefit programs does not explain why other

groups that may be equally dependent upon Congress

amining legislative history of challenged statute to determine

“actual purpose” of discrimination, and refusing to accept

objectives advanced by appellants because Congress had given

no attention to them).

67a

for support should have less access to the legislature.

Other tax-exempt groups, such as universities, are

equally beset by hostile forces but are nevertheless

limited by Section 501 (e) (3) in the amount of lobby-

ing they may do to maintain or inerease their level

of congressional funding. Finally, it emphatically

does not follow that because veterans deserve special

benefits in recognition of their service to the country,

they are entitled to greater First Amendment rights

than other citizens. The First Amendment proscribes

governmental efforts to favor one speaker over an-

other. See, e.g., Carey v. Brown, 447 U.S. at 462-63;

First National Bank of Boston v. Bellotti, 435 U.S.

at 784-85; Police Dep’t v. Mosley, 408 U.S. at 96.

“First Amendment rights may not be used as a type

of ‘currency’ to reward those who have rendered

service to the nation or who are otherwise determined

to be worthy.” Taxation Supp. Brief at 19.

In short, the Code’s classification according tax

benefits to lobbying by some tax-exempt groups but

not others does not withstand constitutional scrutiny.

No identifiable governmental interests justify the

differential tax treatment of lobbying by veterans’

groups and Section 501(c)(3) organizations. The

distinctions and interests suggested by the govern-

ment are either completely unrelated to any sub-

stantial purpose, or reflect only illegitimate govern-

mental goals. “[I]t has been open to courts since

the enactment of the Fourteenth Amendment to deter-

mine, if on the particular facts they must, that a

discrimination reflects no policy, but simply arbitrary

and capricious action.” Baker v. Carr, 369 U.S. 186,

226 (1962) (emphasis by the Court).

68a

C. The Unconstitutionality of These Classifications

Because no substantial purpose justifies the dis-

parate treatment of lobbying by Section 501(c) when

that statute is subjected to careful scrutiny, the dis-

criminatory treatment of Taxation’s First Amend-

ment activities constitutes a denial of equal protec-

tion, and is unconstitutional. Even so, this remains

a troublesome case. Congress has enormous leeway

in classifying the recipients of its benefits and funds,

and in favoring certain groups over others.“ If Con-

gress provided office space and government surplus

furniture to veterans’ organizations, for example, as

Congress clearly has authority to do, it would in-

directly facilitate the lobbying of such groups by

freeing up funds that other organizations such as

Taxation would have to spend for rent and supplies.

Moreover, Congress occasionally appropriates grants

for certain groups with the understanding that the

money may be used for public education, litigation,

and lobbying.“ Similarly, in other contexts such as

National Public Radio and Television, the government

directly funds First Amendment activity that by

Article I, Section 8 of the Constitution empowers Con-

gress to lay and collect taxes and expend public funds for

the general welfare. Its powers under this clause are broad.

See Steward Machine Co. v. Davis, 301 U.S. 548 (1937).

See, e. g., 42 U.S.C. § 2996f(a) (5) (1980) (Legal Services

Corporation prohibited to use funds to influence passage or

defeat of federal or state legislation except in delineated cir-

cumstances); 42 U.S.C. § 5653 (1980) (National Institute

for Juvenile Justice and Delinquency Prevention authorized

to prepare studies and recommendations and disseminate in-

formation to individuals, agencies, and organizations con-

cerned with prevention and treatment of juvenile delin-

quency).

necessity excludes some speakers and favors others.

See Emerson, The Affirmative Side of the First

Amendment, 15 Ga, L. Rev. 7956, 828-28 (1981);

Note, Freeing Public Broadcasting from Unconstitu-

tional Restraints, 89 YALE L. J. 719 (1980) (argu-

ing that direct state subsidy of the Public Broadcast-

ing Service violates the First Amendment).

We suggest nothing concerning the constitutionality

of any of these grants and programs, which of course

are not before us. Nevertheless, it may be observed

that certain principles do distinguish many of these

programs from the lobbying preference now given to

veterans, First, it is well established that although

government may not directly facilitate the speech of

one person over that of another, government too is a

rightful participant in the “marketplace of ideas,” “

Examples, such as the Voice of America and the press

*" See, g, Greer v. Spock, 424 U.S, 828, 888 n.10 (1976);

Toward a Gayer Bicentennial Committee v. Rhode Island

Bicentennial Foundation, 417 F. Supp. 632, 688-89 & n.9

(D.R.1, 1976) (state can inquire whether applicants proposed

use of public area comporta with theme specified by govern-

ment). The government also possesses editorial powers when

it acta as the proprietor of an entity with press rights. See

Avine v. Rutgers, State Univ. of New Jersey, 886 F.2d 161

(8d Cir, 1967), cert. denied, 890 U.S, 920 (1968) (state uni-

versity law review had editorial prerogative of rejecting arti-

cle). It may be dificult, of course, to distinguish between

government-sponsored speech and private speech in close

cases, Compare Bonner-Lyons v. School Committee, 480 F.2d

442 (ist Cir, 1978) with Buekel v. Prentice, 672 F.2d 141

(6th Cir, 1978). See generally Perry Local Educators’ Asa'n

v. Hohit, 662 F.2d 1286, 1292-06 (7th Cir. 1981); Emerson,

supra note 25, at 831, 887; Shiffrin, Government Speech, 27

U. C. L.A. L. Rev, 6656, 677-88 (1980); Yudof, When Govern-

mente Speak: Toward a Theory of Government Expression

and the Firat Amendment, 67 Tex. L. Rev. 868, 908-12 (1979).

70a

offices of executive departments and agencies illus-

trate the government’s authority to communicate

with its citizens and the people of the world, Under

some conditions, it is possible that the government

could also subsidize private groups or speakers in

an effort to get its own message across, Compare

Community-Service Broadcasting of Mid-America,

Ine, v. FCC, 5698 F.2d at 1110 n.17, with Shiffrin,

Government Speech, 27 U. C. L.A. L. RRV. 565 (1980).

Second, the very nature of government may dictate

that it alone can provide certain forums for First

Amendment expression, from parks with rostrums

to a national public television system. First Amend-

ment principles apply to these forums, of course, but

they require that access be nondiscriminatory “

% See, .., Police Department v. Mosley, 408 U.S. 92

(1972) ; Healy v. James, 408 U.S, 169 (1972); Cow v. Lowisi-

ana, 879 U.S, 686 (1966) ; Hague v. C/O, 807 U.S, 496 (1989).

Similar principles govern the time, place, and manner re-

straints that may be applied to First Amendment expression

without violating the Constitution. See, .., Grayned v. City

of Rockford, 408 U.S. 104, 116 (1972) ("The crucial question

is whether the manner of expression is basically incompatible

with the normal activity of a particular place at a particular

time”) ; Kovacs v. Cooper, 886 U.S. 77 (1949) (loudspeakers) ;

Cow v. New Hampshire, $12 U.S, 669 (1941) (parades).

In certain situations, the fact that government has created

the forum seems to permit some discrimination among

apeakers that is directed toward content but neutral with ro-

gard to viewpoint. See, e.g., PCC v. Pacifica Foundation, 438

U.S, 726 (1978 ) (FCC can regulate use of certain words on

airwaves); Lehman v. City of Shaker Heights, 418 U.S, 208

(1974) (plurality opinion) (municipal bus system can permit

commercial but not political advertising). Compare South-

eastern Promotions, Ltd. v. Conrad, 420 U.S. 646 (1975)

(granting claim for access to municipal theatre by promotor

of controversial production) with Young v. American Mini

71

rather than that government not create the facilities

at all, Finally, it is possible that a thorough con-

stitutional analysis of certain programs might well

demonstrate that although the government program

does discriminatorily subsidize certain speakers, the

state interest is su tly compelling that the dis-

crimination is not unconstitutional, Until other pro-

grams that arguably subsidize First Amendment

rights in a discriminatory fashion come before us,

however, it would be injudicious to undertake any

elaborate constitutional analysis of what might now

seem analogous situations.

What does remain crucially important, however, is

that none of these possible justifications can uphold

discriminatory tax treatment of lobbying by different

kinds of Section 501(c) organizations. There is a

brightline distinction between direct legislative pro-

motion of speech, and indirectly facilitating speech

by providing an organization with other kinds of

support. It cannot conceivably be argued that the

lobbying preference for veterans’ organizations dem-

onstrates the government’s attempt to get its own

message across to the public, because the Code pro-

Theatres, Ine., 427 U.S. 60 (1976) (plurality opinion) (up-

holding restrictive zoning ordinance for theatres exhibiting

sexually explicit films). See generally Karat, Publie Enter-

prise and the Public Forum, 87 Onto Sr. LJ. 247 (1976);

Comment, Access to State-Owned Communications Media—

the Public Forum Doctrine, 26 U. C. L.A. LRV. 1410 (1979) ;

Note, The Public Forum: Minimum Access, Equal Access,

and the Firat Amendment, 28 STAN. L.Rev. 117 (1976). Other

standards may be appropriate where the “forum” is not pub-

lic at all. See United States Postal Service v. Couneil of

Greenburgh Civie Ass'n, —— U.S, ——, 49 U.S.L.W. 4818

(1981) (upholding statute prohibiting deposit of unstamped

“mailable” matter in officially approved mailboxes) .

72

vides open-ended subsidization of any position that

these groups choose to espouse even if those positions

directly challenge the policy of the government.”

Without passing judgment on the constitutionality of

congressional attempts to advance the message of

Congress itself by funding the speech of particular

groups, it is clear that Congress cannot write favored

organizations a blank check payable on the First

Amendment.

IV. THe CoNnsTITuTIONAL REMEDY

Section 501 (e) disparate treatment of lobbying

by particular tax-exempt groups leads to an uncon-

stitutional violation of equal protection principles.

* As noted earlier, see note 11 supra, veterans’ organiza-

tions have not restricted their lobbying to issues of particular

importance to veterans, such as veterans’ benefit programs.

A particularly notable example is the lobbying of many vet-

erans’ organizations against the proposed Panama Canal

treaties. See, ¢.g., Panama Canal Treaties: Hearings Before

the Senate Comm. on Foreign Relations, 96th Cong., lat Seas.

566 (1977) (statement of Robert Charles Smith, National

Commander, American Legion); id. at 578 (statement of

Frank D. Ruggiero, National Commander, Amveta); id. at

582 (statement of Maj. Gen. J. Milnor Roberts, U.S. Army

Reserve, executive director, Reserve Officers Ass'n.) ; id. at

595 (statement of Col. Phelps Jones, USA-Ret., director

national security and foreign affairs, VFW) Proposed Pan-

ama Canal Treaties, Hearings Before the House Comm. on

International Relations, 95th Cong., lat & 2d Seas. 166 (1977-

1978) (statement of Dr. John Wasylik, National Commander

in Chief, VF'W) ; id. at 168 (statement of William J. Rogers,

immediate past national commander, American Legion); id.

at 171 (statement of Frank D. Ruggiero, National Com-

mander, Amvetsa); id. at 176 (statement of Dr. Robert P.

Foster, chairman national foreign relations commission, Amer-

jean Legion); id. at 177 (statement of Col. Phelps Jones,

director national security and foreign affairs, VFW).

738

The final question before us is the appropriate relief.

The most obvious remedy—striking down the Section

— (e) (8) lobbying limitation that now governs Tax-

the most obvious problems. The legisla-

tive history of that limitation oc shows u con-

gressional determination that the public interest ro-

quires regulating the amount of tax-deductible dollars

flowing to Section 501 (e) (8) organizations that may

be used for lobbying purposes. Extending the lobby-

ing treatment now given to veterans’ organizations

to all Section 501 (e) (3) groups might open a Pan-

dora’s Box of woes and abuse. The government notes,

for example, that during the 1980 fiscal year, there

were $19,842 organizations listed as exempt under

Section 501 (e) (3), but only 22,247 veterans’ groups.”

In 1978, contributions, grants, and gifts to Section

501 (e) (8) organizations aggregated more than $21.9

billion, nearly 1500 times the $16.7 million given to

veterans’ organizations." If we permitted Section

501(¢)(8) groups to lobby as freely as veterans’

organizations, there would be a clear risk of abuse

by private interests and an increase in the amount of

“selfish” contributions “made to advance the personal

interests of the giver of the money.” 78 Cona, Rec,

5861 (Senator Reed). Even when they attempt to

“IRS Supp. Brief at 40 (citing IRS Exempt Organisa-

tions Master File, 1980 IRS ANN. Rep. 76). The government

cautions that this does not represent a true universe of Section

501 (e) (8) organizations, however, because certain organiza-

tions such as churches need not apply for recognition unless

they desire a rule, and because the ruling letter covers not

only the applying organization but all of ite subordinate

unite.

* Jd. (based on 90 percent of all information returns filed

by such organizations for the 1978 taxable year).

74¹

remedy constitutional violations, courts must resist

ordering relief that clearly exceeds the legitimate

expectations of Congress.”

Taxation also implies the existence of a considerably

narrower remedy. It claims that the most repugnant feature

of the current lobbying limitation in Section 501 (e) (8) is

that organizations that engage in “substantial lobbying” lose

their right to receive any tax-deductible contributions and not

just those contributions used specifically for lobbying. In his

concurring opinion in Cammarano v. United States, for ex-

ample, Justice Douglas suggested that the statute in question

would have been found invalid had it denied all deductions

to an organization that spent money to promote or oppose an

initiative, rather than simply denying deduction of the money

spent in that effort. 868 U.S. at 5615. Taxation therefore

suggesta that an analogous remedy in this case would be to

deny tax-deductibility only in an amount proportionate to

the amount of lobbying in which a Section 601(c) (8) organi-

zation engaged, C/. Harris v. McRae, 448 U.S, 297, 817 1.19

(1980), which held that a “broad disqualification from receipt

of public benefits” may be unconstitutional even when a more

limited exclusion is permiasible. In that case, the Court held

that although Congress might decline to subsidize certain

medically necessary abortions, a “substantial constitutional

question would arise if Congress had attempted to withhold

all Medicaid benefits from an otherwise eligible candidate

simply because that candidate had exercised her conatitution-

ally protected freedom to terminate her pregnancy by abor-

tion.” Id. Taxation argues that precisely the same dispro-

portionate penalty is imposed by Section 501 (e) (8) when an

organization exercises Firat Amendment rights fully, and

urges that the Constitution requires at the very least that its

contributors’ deductions be limited only to the extent of the

amounts actually spent on lobbying by a Section 501 (e) (3)

organization.

Taxation'’s argument is not without merit, but we decline

to grant the alternative remedy for the same reason dis-

cussed above. Each of the several hundred thousand Section

501 (e) (8) organizations now monitored by the IRS may

7b

A second remedy is also possible in this case, As

the Supreme Court has recognized, in certain situa-

tions benefits may be taken away from a preferred

group in order to cure unconstitutionally unequal

treatment, even if that group is not before the

court, See, ¢.g., Welsh v. United States, 398 U.S.

gag, 861-65 (1970) (Harlan, J., concurring in re-

sult); Skinner v. Oklahoma ex rel, Williamson, 316

U.S, 585, 543 (1942), “The right invoked is that to

equal treatment; and such treatment will be attained

if either their competitors’ taxes are increased or

their own reduced.” Jowa-Des Moines National Bank

v. Bennett, 284 U.S, 289, 247 (1981). C/. Kirk v.

Commissioner, 425 F.2d 492, 495 (D.C, Cir.), cert.

denied, 400 U.S, 853 (1970) (refusing to reach con-

stitutionality of income exclusion for ministers be-

cause even if the statute violated the Establishment

Clause, “it would not affect the tax liability in this

case, Rather ministers of the gospel would then no

longer be entitled to the benefits of the exclusion,”),

Although a number of cases involving equal protec-

tion challenges to underinclusive federal benefit stat-

have hundreds of thousands of separate contributors, For

each organization, the IRS would have to ascertain the pro-

portion of lobbying activities to other expenses of the or-

ganization, and then trace that percentage through to the

individual contributions in order to limit the amount of their

deductibility to the game proportion. In a leas complex world,

this logical acheme might be appropriate, although it would

not cure the equal protection violation found here. But this

remedy could easily overload and destroy any IRS capacity

for monitoring these organizations and become an administra-

tive nightmare subject to widespread disregard or abuse,

Although mandating such a remedy is within the authority of

Congress, this court should not impose a massive new work-

load on the IRS that leads to so partial a cure of the dis-

crimination shown here.

76a

utes suggest that “extension, rather than nullification,

is the proper course,” Califano v. Westcott, 443 U.S.

76, 89 (1979), “[ijn choosing between these alterna-

tives, a court should attempt to accommodate as fully

as possible the policies and judgments expressed in

the statutory scheme as a whole.” Id. at 94 (Powell,

J., dissenting). It seems evident that the legislative

judgments expressed in Section 501(c) will be less

disturbed by striking down the preferential treatment

now accorded the lobbying of veterans’ organizations

than by extending that treatment to Section 501 (e)

(3) organizations. The legislative history, suggesting

that the current treatment of veterans may have been

inadvertent but demonstrating a clear congressional

concern to prevent abuse of charitable lobbying by

private interests, fully confirms this view.

This remedy appears the most logical and most in

accordance with the judgments expressed by Con-

gress. But the veterans’ organizations that would be

directly affected by nullification of preferential treat-

ment in Section 501(c) have not heretofore been

parties to this litigation. Courts must always be

cautious when dealing with the interests of those who

have not had an opportunity to present their own

arguments and defenses, partly because judicial

legitimacy stems in large measure from hearing the

views of all those who are directly involved. See

Fiss, The Supreme Court, 1978 Term—Foreword:

The Forms of Justice, 93 Harv. L. REV. 1, 44-46

(1979). It is less significant, though still noteworthy,

that Taxation also opposes this solution to the uncon-

stitutionality of Section 501 (e).“ We therefore de-

cline to adopt this remedy at this time.

Taxation Supp. Brief at 20 n. 4. In Jowa-Des Moines Bank

v. Bennett, 284 U.S. at 247, the Court ordered a refund of

77a

Accordingly, this case is remanded to the district

court with the instruction that it cure the constitu-

tionally invalid operation of Section 501(c) after

inviting veterans’ organizations to participate in

framing the relief. In the interim, of course, the IRS

may seek other remedies. It may decide that addi-

tional regulations governing lobbying by veterans’

organizations—and more diligent enforcement of the

lobbying regulations that already govern those or-

ganizations—are in fact in accordance with the con-

gressional purpose behind Section 501 (e).“ The IRS

and veterans’ groups might also seek from Congress

a clearer determination of the purposes, if any, that

Congress had in mind when it enacted legislation

giving preferential tax treatment to lobbying by vet-

erans, or passage of more narrow legislation that

could show that veterans’ groups actually speak for

Congress in advocating specific kinds of veterans’

programs and benefits. On the record before us,

however, it is not even clear that Section 501(c)’s

unequal application reflects any congressional intent

whatsoever. The broad tax support provided to vet-

erans’ organizations for lobbying on any side of any

issue they choose, and the companion restriction in

lobbying by charitable groups and other Section 501

“the excess of taxes exacted” from appellants because it is

well settled that a taxpayer who has been subjected to dis-

criminatory taxation through the favoring of others in viola-

tion of federal law, cannot be required himself to assume the

burden of seeking an increase of the taxes which the others

should have paid.”

The IRS presumably came to analogous conclusions con-

cerning the treatment of lobbying by fraternal beneficiary

societies, despite the apparent silence of the Code on that

question. See pp. 10-11 supra.

CONCLUSION

The First Amendment occupies a preferred place

in our scheme of government. Thomas v. Collins, 323

U.S. 516, 530 (1945). This does not mean, however,

that its application in a legal dispute is always

simple. The lines will seem clearer when Congress

directly prohibits a particular group from speaking

in a particular place, and more confused when Con-

gress subsidizes First Amendment expression un-

evenly through the itricacies of the Internal Revenue

Code. Nevertheless, the principle remains the same.

Because the Code differentiates in its treatment of

protected First Amendment activity by various tax-

exempt organizations, the constitutionality of its clas-

sifications must be judged by a heightened level of

scrutiny.

When viewed in that light, there can be no ques-

tion that the suggested distinctions between Taxa-

tion and preferred tax-exempt organizations are con-

stitutionally meaningless. Discrimination in govern-

ment subsidization of First Amendment rights must

be narrowly tailored to meet a substantial state pur-

pose, and the proffered distinctions between the fav-

ored groups and Section 501 (e) (3) organizations are

either unrelated to any governmental interest what-

soever or are illegitimate bases for governmental

classification. Indeed, although it has not been neces-

sary to reach the question, it is possible that these

discriminations could not even be upheld under a

79a

test asking whether they were “rationally related to

a legitimate governmental purpose,” for the discrimi-

nation may have been nothing more than an acci-

dental or inadvertent result of legislative drafting.

Tax discrimination against the lobbying of Taxa-

tion and similar tax-exempt organizations therefore

fails to meet the constitutional standard appropriate

here. We reverse and remand this case with instruc-

tions that the unequal treatment be cured, either by

restricting the tax benefits accorded veterans’ or-

ganizations or by extending those benefits to Section

501(c)(3) organizations. Even in the arcane in-

tricacies of the tax code, the government cannot give

special voice nor lend special ear to any person or

group no matter how worthy their ideas or their

credentials. The exacting standards of the First

Amendment do not allow the government to provide a

preferred place for certain parties—at least not with-

out a more substantial state purpose than has been

shown here.

Reversed and remanded

MACKINNON, Circuit Judge (dissenting). Appel-

lant Taxation with Representation of Washington

(Taxation) is incorporated as a nonprofit charitable

and educational organization whose purpose is to rep-

resent the general public on tax issues before Con-

gress, the courts, and the executive branch. After

its incorporation in June 1977, Taxation applied to

the Internal Revenue Service (IRS) for a declara-

tion that it was an organization described in § 501

(e) (3) of the Internal Revenue Code (Code), 26

U.S.C. 5 501 (e) (3). Although Taxation may other-

wise have qualified for section 501 (e) (3) status,“

the IRS determined that Taxation intended to devote

a substantial part of its activities to “attempt[s] to

Section 501 (e) (3) applies to:

Corporations, and any community chest, fund, or founda-

tion, organized and operated exclusively for religious,

charitable, scientific, testing for public safety, literary,

or educational purposes . . no part of the net earnings of

which inures to the benefit of any private shareholder or

individual, no substantial part of the activities of which

is carrying on propaganda, or otherwise attempting, to

influence legislation (except as otherwise provided in sub-

section (h)), and which does not participate in, or inter-

vene in (including the publishing or distributing of state-

ments), any political campaign on behalf of any candiate

for public office.

(emphasis added). Such organizations are exempt from tax-

ation under the income tax subtitle unless such exemption is

denied under I. R. C. §§ 502, 503, or 504, sections with which

we are not concerned in this appeal. Wholly apart from the

issues raised by the lobbying restriction, it could be seriously

questioned how an organization the avowed purpose of which

is the lobbying of Congress has a ‘religious, charitable, scien-

tific, testing for public safety, literary or educational purpose’

that brings it within § 501 (e) (3) in the first instance.

81a

influence legislation“ by lobbying Congress on mat-

ters involving the federal tax system. The effect

of that determination, the correctness of which Tax-

ation does not contest, was to deprive it of several

tax advantages, including exemption from certain

taxes on its own activities* and the eligibility to re-

ceive tax deductible contributions.“ (These advan-

* Tax benefits accruing to a § 501 (e) (3) organization in-

clude: exemption from income tax by virtue of § 501 (a);

exemption from § 3111(a)’s federal social security (FICA)

taxes by virtue of § 3121(a), (b) (8) (B) ; and exemption from

§ 3301's federal unemployment (FUTA) taxes by virtue of

§ 3806 (b), (e) (8).

I. R. C. § 170 provides for the deduction of contributions

from income tax:

(a) Allowance of deduction.—

(1) General rule.— There shall be allowed as a de-

duction any charitable contribution (as defined in

subsection (e)) payment of which it made within

(e) Charitable contribution defined.—For purposes of

this section, the term “charitable contribution” means a

contribution or gift to or for the use of—

@ A corporation, trust, or community chest,

fund, or foundation—

(A) created or organized in the United States

or any possession thereof, or under the law of

the United States, any State, the District of

Columbia, or any possession of the United

States ;

, (B) organized and operated exclusively for

religious, charitable, scientific, literary, or edu-

cational purposes, or to foster national or inter-

national amateur sports competition (but only

if no part of its activities involve the provision

82a

tages are referred to collectively herein as the “tax

benefits” accruing to organizations qualifying under

section 501(c)(3).) Taxation may still qualify for

tax exemption on its own income as a social welfare

organization under I.R.C. section 501(c)(4).* That

of athletic facilities or equipment), or for the

prevention of cruelty to children or animals;

(C) no part of the net earnings of which in-

ures to the benefit of any private shareholder or

individual ; and

(D) Which is not disqualified for tar exemp-

tion under section 501(c)(3) by reason of at-

tempting to influence legislation, and which does

not participate in, or intervene in (including

the publishing or distributing of statements),

any political campaign on behalf of any candi-

date for public office. [Emphasis added.]

Similar language permits donors to make analogous deduc-

tions with respect to the gift tax, I. R. C. § 2522 (a) (2) (citi-

zens or residents) & (b) (2) (nonresident aliens), and the

estate tax, I. R. C. §§ 2055 (a) (3) (citizens or residents) &

21086 (a) (2) (A) (ii) (nonresident aliens).

In addition, foundations may be deterred from contributing

to an organization that fails the lobbying test for section 501

(e) (3) status because otherwise untaxed foundations and

their managers are subject to tax if the foundation pays any

amount to carry on propaganda, or otherwise to attempt, to

influence legislation.“ I. R. C. § 4945 (a), (d) (1).

Section 501 (e) (4) applies to:

Civie leagues or organizations not organized for profit

but operated exclusively for the promotion of social wel-

fare, or local associations of employees, the membership

of which is limited to the employees of a designated per-

son or persons in a particular municipality, and the net

earnings of which are devoted exclusively to charitable,

educational, or recreational purposes.

Taxation is the product of a merger between two organiza-

tions, one (Taxation with Representation Fund) a § 501(c)

subsection, however, while placing no restrictions on

an organization's lobbying activities, does not result

in donors being permitted to deduct contributions

from their own income, gift and estate taxes."

After exhausting its administrative remedies, Tax-

ation brought a declaratory judgment action against

the Commissioner of Internal Revenue under 26

U.S.C, § 7428 (1976), seeking a declaration that

section 501(¢)(3)'s restriction of substantial at-

tempts to influence legislation is unconstitutional.

The district court granted the Commissioner’s motion

for summary judgment, Tawation with Representa-

tion of Washington v. Blumenthal, 48 K. F. T. R. 2d

(P-H) 79-419 (1979), and on appeal, a divided

panel of this court affirmed. Tawxation with Repre-

sentation v. Blumenthal, No. 79-1464 (D.C, Cir.

April 14, 1981). On June 11, 1981, this court voted

to hear the case en bane, which under our rules va-

cates the panel opinions. The court’s order stated

that the hearing en bane would focus upon two is-

sues: (1) the standard of review applicable to the

challenged statutory scheme, and (2) the ultimate

(3) group devoted to courtroom advocacy, and the other

(Taxation with Representation) a § 501 (e) (4) group devoted

to legislative advocacy. See J. A. at 16.

Taxation could also seek to qualify under I. R. C. § 501(h),

which permits some § 5601 (e) (8) organizations to devote spec-

ified quantities of their exempt purpose expenditures to lobby-

ing, rather than adhere to the less certain “substantiality”

teat of § 501 (e) (8). In the district court, however, Taxation

expressly disavowed any intention to make an election under

§ 501 (h). J.A. at 16-16. See discussion at 22-24 infra.

* Section 7428 authorizes certain courts to issue declaratory

judgments in certain cases relating to the status and classifi-

cation of organizations under 26 U.S.C. § 601 (e) (8).

84a

constitutionality of the Code’s distinction between

fraternal and veterans’ organizations on the one hand

and section 501 (e) (3) exempt organizations on the

other."

I,

A case raising the same issue presented here was

decided against one of Taxation’s predecessor or-

ganizations * by the Fourth Circuit in Tawation with

Representation v. United States, 585 F.2d 1219 (4th

Cir, 1978), cert. denied, 441 U.S. 905 (1979). The

district court in this case followed that decision in

disposing of Taxation’s contentions, 43 A.F.T.R.2d

(P-H) 4 79-419 at 79-681. For the reasons set forth

in the margin, I find the present suit not barred by

the doctrine of res judicata, and therefore address

the merits.”

Taxation also originally challenged the validity of permit-

ting businesses to deduct their lobbying expenses as “ordinary

& necessary” business expenses. See I. R. C. § 16% (e). That

contention was not pursued before the court en banc, and we

do not reach its merits here.

* See note 4 supra.

* Taxation’s papers in the district court made clear that it

absorbed the functions of the taxpayer organization that lost

in Taxation with Representation. See J. A. at 16-18. The ree-

ord before the district court also establishes that Taxation

has the same chief executive as had Taxation with Repre-

sentation, the appellant in the Fourth Circuit case, compare

id. at 14 with id. at 16, and employs the same attorney, com-

pare id. at 6 with 685 F.2d at 1220, Despite this close rela-

tionship between issues and parties, the Government has not

pleaded or argued that Taxation should be precluded, as a

matter of res judicata or collateral estoppel, from litigating

the issues the Fourth Circuit decided against Taxation with

Representation.

Although collateral estoppel and res judicata are waivable

affirmative defenses under Fed. R. Civ. P. 8(c), some courts

Taxation challenges the Tax Code's denial of tax

benefits to otherwise qualified organizations which

engage in substantial lobbying on what it views as

have addressed the preclusion issue sua sponte where in-

formation within their notice has effectively relieved the

defendant of his usual burden of proof on the issue. F..,

Boone v. Kurts, 617 F.2d 486, 486 (6th Cir. 1980) (“[B)ven

though Fed. R. Civ. P. (e) denominates res judicata as an

affirmative defense, [d]iamissal by the court sua sponte on

res judicata grounds . is permissible in the interest of judi-

cial economy where both actions were brought before the

same court”); Gullo v. Veterans Coop. Housing Ass'n, 269

F.2d 617, 617 (D.C. Cir. 1969) (trial court may apply res

judicata upon taking notice of parties’ previous case) ; Wilson

v. United States, 166 F.2d 627, 528-29 (8th Cir, 1948) (ap-

pellate court on own ‘notion may determine action is barred

by res judicata) Holmes v. United States, 281 F. Supp. 971,

972-78 (N. D. Ga. 1964), aff'd, 868 F.2d 785 (5th Cir. 1965)

(court, apparently on own motion, took judicial notice of

prior proceedings and applies res judicata on defendants’

motion for summary judgment). Accord, cases cited in United

States v. Sioux Nation, 448 U.S. 871, 482 (1980) (Rehnquist,

J., dissenting) . See also Southern P. R.R. v. United States, 168

U.S. 1, 56-61 (former judgment held conclusive even though

estoppel not specially pleaded).

The rationale for sua sponte action on questions of preclu-

sion is that relitigation should be precluded not simply to

serve defendant's interest in avoiding litigation, but also to

avoid judicial waste and to foster reliance on judicial deci-

sions, Wilson v. United States, supra, 166 F.2d at 528-29;

see generally Montana v. United States, 440 U.S. 147, 158-54

(1979) and authorities cited. The defendant's consent to ro-

litigation cannot always be decisive, for there is an inde-

pendent public interest “in preventing the misallocation of

judicial resources and second guessing prior panels of Art.

III judges when the issue has been fully and fairly litigated

in a prior proceeding.” United States v. Sioux Nation, supra,

448 U.S. at 488 (Rehnquist, J., dissenting).

We are thus tempted to determine whether Taxation should

be estopped to litigate the same issues on which Taxation

two independent grounds, First, it asserts that sec-

tion 501 (e) (3), by conditioning tax benefits on the

non-exercise of an organization’s rights of speech,

press, and petition, violates the first amendment.

This attack does not rely on any distinctions drawn

by the Code among organizations, but rather pro-

ceeds from the premise that the lobbying restriction

is invalid, regardless of the uniformity of its ap-

plication, as a burden on protected speech. See Tax-

ation Br. at 15. Second, Taxation argues that the

Code, by placing restrictions on the lobbying activi-

ties of section 501 (e) (8) organizations while placing

no similar restrictions of those of veterans’ organiza-

tions defined in section 501 (e) (19) or fraternal or-

ders defined in sections 501(c)(8) and (10), denies

it the equal protection of the laws guaranteed by the

fifth amendment’s due process clause.“

with Representation lost in the 4th Circuit. However, the

Government's failure to plead preclusion at any stage of this

litigation deprived Taxation of an opportunity to argue that

such defense should not apply, and it is not clear that Taxa-

tion has no arguable objection to such application. We thus

have a choice of remanding for a hearing on that issue, see,

¢.g., Blonder-Tongue Laboratories, Inc. v. University of Un-

nois Foundation, 402 U.S. 318 (1971) (remanding to permit

defendant to plead collateral estoppel and plaintiff to chal-

lenge the plea), or of disposing of Taxation’s case on the

merits. The original panel determined that judicial economy

would be best served by taking the latter course, and so pro-

ceeded to the substantive issues, as we have determined to

do here.

“TI)f a classification would be invalid under the Equal

Protection Clause of the Fourteenth Amendment, it is also

inconsistent with the due process requirement of the Fifth

Amendment.” Johnson v. Robison, 416 U.S. 861, 964 n4

(1974). See Buckley v. Valeo, 424 U.S. 1, 98 (1976).

87a

II.

Taxation’s first claim is based on the contention

that the statutory denial of tax benefits to organiza-

tions that engage in substantial lobbying places an

“unconstitutional condition” upon the enjoyment of

those benefits.“ The cornerstone of this argument

is Speiser v. Randall, 357 U.S. 513 (1958), in which

the opinion of Justice Harlan for the Court estab-

lished the proposition that the enjoyment of a gov-

ernment-conferred benefit cannot be made contingent

upon compliance with a condition that violates the

first amendment rights of one who would otherwise

qualify for the benefit.” Taxation urges that the

lobbying restriction in section 501 (e) (3) imposes

precisely such a condition. This contention, as the

majority recognizes, is without merit.

Taxation does not claim that the challenged pro-

visions “chill” its speech by imposing a direct restrie-

tion or penalty upon its lobbying activities. Nor,

'! We consider primarily the denial of tax exemption for

Taxation’s own income, but note that there is no serious ques-

tion as to Taxation's standing to challenge conditions upon

the deductibility of donors’ contributions to it. It is our under-

standing that in doing so, Taxation is asserting its own

rights, and not the rights of third party potential donors not

before the court.

Speiser invalidated a requirement that persons seeking to

qualify for a state constitutional property tax exemption for

veterans sign a loyalty oath. The Court held that the require-

ment improperly created a presumption of disloyalty on the

part of applicants the burden of overcoming which imper-

missibly chilled the applicants’ exercise of their speech rights.

“The man who knows that he must bring forth proof and

persuade another of the lawfulness of his conduct necessarily

mu

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