Posted June 28, 2007 by Frances R. Hill

WRTL and Tax Exemption: Possible Consequences of an Agenda-Setting Opinion

Wisconsin Right To Life is a section 501(c)(4) organization that is a component of a complex structure, including a section 501(c)(3) public charity and a section 527 political action committee.  Reading the Supreme Court’s decision raises two questions about these facts.  Did the tax status of WRTL matter to the Court or play any role at all in the Court’s reasoning ?  Did the Court’s various opinions have any implications for tax exemption?

If this were a novel, as the ongoing frenzy over Harry Pottery teaches, it would be unwise to begin with the conclusion and then explain the reasoning.  But, this is not a novel, so a different approach seems reasonable—conclusion first, explanation to follow.

Did the tax status of WRTL matter to the Court or play any role at all in the Court’s reasoning ?  No, tax status did not matter.  Why it did not matter is important to understanding the breadth of the opinion.  Did the Court’s various opinions have any implications for tax exemption ?  The opinion is likely to matter a very great deal to exemption, but the ways it will matter and the consequences of it are uncertain.

This unlikely perspective is based on the conclusion that Chief Justice Robert’s opinion is an agenda-setting, framework-defining opinion that does not attempt to resolve issues as much as it attempts to put them on the jurisprudential agenda.  The controversy going forward will not be with the dissent, but with the four justices who wrote concurring opinions, particularly Justice Scalia and Justice Kennedy.  The final contours of the framework for campaign finance jurisprudence will emerge from these negotiations, but they will be shaped by Chief Justice Robert’s agenda-setting opinion that now controls the large outline and very possibly the pace of change.

Seeing the Roberts opinion as an agenda-setting, framework-defining opinion helps explain why WRTL’s tax status did not matter and why the fact that it did not matter itself matters very much.  The opinion describes WRTL as “a nonprofit, nonstock, ideological advocacy corporation recognized by the Internal Revenue Service as tax exempt under §501(c)(4) of the Internal Revenue Code.”  This is the last reference to tax status.  After that, the opinion on occasion refers to nonprofit status in an evocative but not analytical way, generally to bolster a point about the rights of corporations.  WRTL is of greater interest to John Roberts because it is a corporation than because it is a tax exempt nonprofit corporation.

The only other reference to nonprofit status comes near the end (slip opinion at 28, n.10), where Chief Justice Roberts notes that some of WRTL’s amici attempt to distinguish nonprofit corporations from business corporations.  Roberts observes that “[w]e do not pass on this argument in this as-applied challenge because WRTL’s funds for its ads were not derived solely from individual contributions.”  The importance of this enigmatic statement will be discussed below.

The lack of interest in the nonprofit tax exempt status of WRTL is consistent with a jurisprudence of political speech without reference to speakers.  As Chief Justice Roberts states in the first sentence of his concluding section, “These are cases about political speech.” (Slip opinion at 28.)  The characteristics of the speakers do not matter.  The activities of the speakers do not matter.  The intent of the speakers or the consequences of their activities do not matter.  The context in which the speakers speak does not matter.  The relationships between the speakers and the candidates do not matter.  The implications and effects of the speakers’ actions for public policy or representative government do not matter.  Listeners do not matter.  Voters do not matter.  Speech is, to borrow a phrase from Hegel, “a thing in itself.”

But, if exempt status is so irrelevant, how can one suggest that the Roberts opinion may have an important effect on tax exemption ?  Perhaps, of course, one cannot.  But, this post is about my consideration of the possibilities, not offering odds on outcomes or on the timing of outcomes. 

Justice Scalia is not interested in WRTL’s exempt status either.  He is primarily interested in driving a stake through the heart of McConnell and expresses his displeasure with Roberts for being coy and not simply getting on with it.  Scalia is more annoyed with stare decisis than with context because he thinks it’s the major impediment to his objectives.

Justice Souter, joined by Justices Stevens, Ginsburg, and Breyer, dissent because both context and stare decisis matter to them.  They accuse Chief Justice Roberts of radicalism, not coyness.  The long historical prelude in the dissent is a bill of particulars, an inventory of the jurisprudential casualties of the Roberts opinion.  It is the dissent’s way of charging the Chief Justice with being a radical without actually saying it.

The dissent has little doubt that exempt entities will be casualties.  The main problem that the dissent identifies is the expanded use of nonprofit organizations as campaign finance conduits.  While this seems a likely result in the near term, it does not capture the nature or extent of the implications for exempt entities.  Indeed, the dissent does not grasp how eagerly so many large exempt entities await the new era suggested by the Roberts’ framework.  Serving as a conduit is one way of getting a seat at the tables of the powerful, although not necessarily a very good seat, from which the conduit can be heard on matters of moment.  Paradoxically, some of the organizations that tried to derail the Roberts nomination will have the most to gain in this near term, interim period.

Chief Justice Robert’s apparent rejection of context as a significant factor in characterizing political speech as issue advocacy has obvious potential application to characterization of speech as participation or intervention in a political campaign for purposes of tax exemption.  Of course, WRTL does not address these issues.  Nothing concrete has changed.  Throughout the “magic words” period of election law jurisprudence, tax law worked with a context-based facts and circumstances analysis that the Court not only did not disturb but in fact reinforced in Regan v. Taxation with Representation.  Why should we even consider that things will be different going forward?

On the surface and in the near term, nothing will be different.  Indeed, the Internal Revenue Service has recently issued its first revenue ruling relating to issue advocacy by section 501(c)(3) public charities in over twenty years.  Revenue Ruling 2007-41 is resolutely and pervasively contextual in its approach, a topic to be considered in a future post.  WRTL does not have any immediate implications for reliance on this ruling.

If, however, WRTL is an agenda-setting, framework-defining opinion, particularly in Parts III and IV of the Roberts opinion, the Parts that Justices Scalia, Kennedy, and Thomas did not join, then much will change precisely because the speaker does not matter.  In a jurisprudential environment in which Bellotti is read expansively (as Chief Justice Roberts seems inclined to do) to encompass participation by business corporations in candidate elections, not simply in referenda, distinctions between nonprofit tax exempt corporations and business corporations will cease to have meaning.  If constitutional interpretation based on speech without regard to speakers becomes the Court’s position, then distinctions among types of exempt organizations will also become irrelevant.  At that point, Regan v. Taxation with Representation is irrelevant and so is Austin and the debate over the PAC alternative, which Roberts dismisses in a footnote.

What will be relevant ?  The answer suggested by the Roberts’ opinion is that corporate form will be relevant.  Both Roberts and Scalia spend inordinate amounts of space discussing restrictions on corporate speech and the importance of Bellotti.  If the speaker does not matter, then all speakers should be treated alike.  Corporations are persons too.  Their tax status is irrelevant.  This is the position that Roberts seems to take in his disinterest in arguments made by certain of the WRTL amici that nonprofit corporations should be distinguished from business corporations.

There is another possible reading of this footnote based on Robert’s reference to WRTL’s source of funds.  He seems to be saying that any distinction is obviated by the act of taking money from business corporations, at least in this case.  That reading would serve as a barrier to the use of nonprofit tax exempt corporations as conduits.  More importantly, it would suggest that distinctions among speakers retain some constitutional salience.  The thrust of the opinion suggests otherwise.

If speech is a thing in itself and all speakers are treated the same, then limitations on political speech by exempt entities could not be sustained.  This issue is, of course, far from the immediate issue before the Court in WRTL but not necessarily far from the broader agenda of the Roberts opinion.  WRTL sought a kind of MCFL-lite treatment that would have allowed it to run its ads on the theory that they were legislative lobbying and pay for them with general treasury funds that included contributions from business corporations.  Chief Justice Roberts recast the case as a case about political speech without reference to the nature of the speaker.  In this approach, MCFL and Taxation with Representation and Austin may simply be irrelevant.  And the Internal Revenue Service’s context-based approach to determining whether speech by certain speakers constitutes electioneering would appear impermissible.  This would mean that the subsidy rationale for various limitations on campaign activity by different types of exempt entities is also irrelevant.  This does not seem to be such a big step from Chief Justice Roberts’ rejection of all of the rationales for limitations on various speakers in the Court’s long history of campaign finance jurisprudence.  Indeed, if both criminal penalties and civil litigation are suspect as burdens on political speech, can taxes be far behind?  Are any limits on political speech by exempt entities impermissible ?  Is section 162(e), which denies deduction of political contributions and lobbying costs as ordinary and necessary business expenses (by any and all taxpayers who earn business income, including individuals and corporations), similarly impermissible?

Ultimately, under the Roberts approach, all speakers are the same.  The Constitution permits no distinctions among speakers.  There is no Constitutional room for choice of entity planning.  What then?

Indeed, what then?  Will this provide an opportunity to redesign and redefine exemption from taxation?  Will section 501(c)(3) organizations replace section 527 organizations as the preferred campaign vehicle?  The only certainty is that the fate of Harry Potter will be revealed before we know what will happen as a result of the Roberts agenda.