# Appendix — Regan v. Taxation With Representation of Wash.

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_0226%3A02

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1983
- **Citation:** 461 U.S. 540

## Text

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.

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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’

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385009_0226%3A02. Public record. Not legal advice.