Conservative Organization Denied 501(c)(4) Status Lacks Standing to Challenge Revenue Ruling 2004-6, According to Fifth Circuit

In 2011, Freedom Path, a would-be social welfare organization sought exempt status under 501(c)(4).  In 2013, the Service notified Freedom Path that it was not operated “exclusively for the promotion of social welfare.”  The Service relied, in part, on the facts and circumstances test in Revenue Ruling 2004-6 to support its conclusion that the organization engaged in too much political campaign intervention and therefore was not primarily engaged in the promotion of social welfare.  Freedom Path brought an action seeking to declare Revenue Ruling 2004-6 facially  unconstitutional because it’s vagueness “chilled” the exercise of rights guaranteed under the First Amendment.  A Federal District Court in Dallas found that Freedom Path had standing but that Revenue Ruling 2004-6 was not unconstitutional.  Freedom Path appealed.  In a January 16, 2018 opinion, the reasoning of which I found somewhat muddled, the Fifth Circuit Court stated that Freedom Path lacked standing:

Freedom Path asserts there is standing to make a facial challenge to the “Facts and Circumstances Test” of the Revenue Ruling because the test is vague, overbroad, and chills its speech. A specific allegation in the complaint is that Freedom Path decided not to air “Leader,” a television advertisement, because this test made it unclear whether airing the ad would be viewed as an exempt function activity or non-taxable issue advocacy. “Chilling a plaintiff’s speech is a constitutional harm adequate to satisfy the injury-in-fact requirement.” Houston Chronicle Publ’g Co. v. City of League City, 488 F.3d 613, 618 (5th Cir. 2007).

Even if Freedom Path has made a sufficient claim of chilled speech, the injury must be traceable to the allegedly vague provision. For Freedom Path to have standing, we must be convinced that a supposedly vague Facts and Circumstances Test is what chills Freedom Path’s speech.

Freedom Path emphasizes that the IRS relied in part on the Revenue Ruling in its proposed denial of Freedom Path’s Section 501(c)(4) status, and consequently the Revenue Ruling was the agent of its injury. Further, Freedom Path argues its status as a 501(c)(4) organization could be threatened if the IRS determines that too many of its expenditures were for exempt functions rather than issue advocacy.

The problem we see with this argument is that the plaintiff is not arguing that the law in question is invalid because of how that directive affects its tax liability — which is the determination that is the purpose of the Revenue Ruling. Instead, Freedom Path’s argument is that the IRS uses this Revenue Ruling for other purposes as well, and specifically as one of the tests for determining whether an applicant is entitled to recognition as a 501(c)(4) organization.

This argument leaves the facial terms of the Revenue Ruling behind and moves into the arena of an as-applied challenge. To find the unconstitutionality Freedom Path claims requires that we go beyond the language of the Revenue Ruling and analyze the way in which the IRS applies it beyond the text. On a facial challenge, however, we do not look beyond the text. See Washington State Grange v. Wash. State Republican Party, 552 U.S. 442, 449-50 (2008). We agree that “[a] ‘facial challenge’ to a statute considers only the text of the statute itself, not its application to the particular circumstances of an individual.” Field Day, LLC v. Cnty. of Suffolk, 463 F.3d 167, 174 (2d. Cir. 2006). The Revenue Ruling does not even facially apply to determinations of an organization’s Section 501(c)(4) status. Instead, the purpose of the Revenue Ruling 2004-6 is to determine whether particular expenditures of funds by a 501(c)(4), 501(c)(5), or 501(c)(6) organization were for an exempt function “as described in [Section] 527(e)(2).” Rev. Rul. 2004-6, 2004-1 C.B. at 329.

We cannot conclude based on Freedom Path’s arguments that its alleged injury of chilled speech is traceable to the text of Revenue Ruling 2004-6. Indeed, whatever vagueness it may have does not lead to uncertainty about the tax liability of organizations like Freedom Path when they have no investment income. That is because, as we earlier discussed, an organization is taxed under Section 527 for exempt function activity only to the extent the organization has net investment income. I.R.C. §527(f)(1). Freedom Path admittedly has no such income and no tax obligation.

Darryll K. Jones