Editors’ Note: Ellen P. Aprill reviews Philip Hamburger’s Liberal Suppression: Section 501(c)(3) and the Taxation of Speech. Hamburger introduced his book’s central arguments in a previous HistPhil post and replies to Aprill’s review in the comments below.

Philip Hamburger’s Liberal Suppression: Section 501(c)(3) and the Taxation of Speech opposes on constitutional grounds the limitation on lobbying and the prohibition of campaign intervention required of charities, including churches, exempt under the Internal Revenue Code. The book is erudite, thoughtful, and thought-provoking. I learned a great deal from it. I also share a number of the author’s concerns. As a tax professor, naturally enough, I see these issues primarily through a tax lens, and this context leads me to draw conclusions regarding section 501(c)(3) quite different from those Hamburger comes to as a constitutional scholar. Yet I also believe that establishing a common understanding of the provision’s place in the Internal Revenue Code is crucial to any critique of it.

Language from Regan v Taxation with Representation (TWR), the 1983 case to which the book often refers, helps frame the contrast between our points of view. Against constitutional challenge, the Supreme Court in TWR upheld the limitation on substantial lobbying for entities exempt under section 501(c)(3) against constitutional challenge. Professor Hamburger’s book, my earlier work, and that of others have extended its reasoning, in particular its reliance on the principle that Congress has no duty to subsidize political activity, to section 501(c)(3)’s prohibition on campaign intervention as well.

Bases for the Limitations

Hamburger’s critique looks to the TWR Court’s observation that the issue before it “would be different if Congress were to discriminate invidiously in its subsidies in such a way as to aim at the suppression of dangerous ideas.” He believes that the history of section 501(c)(3) demonstrates precisely such an intent. He argues that liberal ideals exalting independent, individual reasoning created a free-floating prejudice against Catholics and other “idealistic” groups that adhere to a set of beliefs and, further, that this animosity would meet the high standard for discrimination articulated in TWR. In my opinion, this argument proves too much. Many pieces of legislation reflect the prejudices of their times. If legislative acceptance of the prevailing zeitgeist rendered Congressional action unconstitutional, much legislation would risk invalidation. For examples, scholars have argued that unconscious racial bias continues to shape many areas of law.

More specifically, the legislative history of the provisions regarding these limits on political activity—that is, both lobbying and campaign intervention—discloses other rationales for them. Regarding lobbying, Hamburger argues that the very word “propaganda,” the term section 501(c)(3) adopts, had a particularly, although not exclusively, anti-Catholic connotation. He speaks of “liberal anxieties about the full range of private group speech.” I would emphasize instead Congressional concern about lobbying on behalf of personal interests of donors, particularly wealthy donors. Even after adoption in 1934 of the lobbying limit in section 501(c)(3), Congressional apprehension continued. A series of Congressional hearings in the 1960’s focusing on private foundations—a type of section 501(c)(3) organization funded and controlled by an individual, a family, or a corporation—included lengthy testimony about influencing legislation. When Congress, in response to these hearings, enacted a series of excise taxes regulating private foundations in 1969, it included a provision that for all practical purposes imposes an absolute ban on lobbying by private foundations. Congressional concern about individuals deploying section 501(c)(3) organizations to lobby out of self-interest bears little resemblance to anxiety about the speech of idealistic groups.

The basis for the second restriction, the ban on campaign intervention, is far from certain. According to many, Senator Lyndon Johnson introduced it as a floor amendment in 1954 because of personal animus resulting from a nonprofit’s  opposition to his candidacy. (Based on this history, the ban is now generally called the Johnson Amendment.) Hamburger suggests that liberal mistrust of idealistic private organizations enabled Johnson’s amendment to succeed. But there is another likely explanation. Both a well-respected IRS training text and recent scholarship suggest a less malign motivation for Johnson’s action—a desire to avoid a far more restrictive provision by the influential Senator McCarran. Reflecting the enormous anti-Communist sentiment of the time, it would have revoked the exempt status of any organization making donations to subversive individuals or organizations.

Hamburger does much to help us understand the temper of the times surrounding enactment of the limitations in section 501(c)(3). In evaluating what he deems to be a pervasive liberal anxiety and prejudice, he recognizes that any animosity was not necessarily deliberate or self-conscious. Because of this concession, his account does not demonstrate to my satisfaction that liberal opposition to idealistic groups, particularly to the Catholic Church, formed the basis for these constraints to an unconstitutional degree.

I do agree with Hamburger that legislators and regulators often struggle to deal with the religions of minority groups, whether Catholic or non-Christian. For example, I chuckle whenever I consult the revenue ruling concluding that a Jewish cantor is a “minister of the gospel” for purposes of the clergy housing allowance. More basically, the Internal Revenue Code does not explain what constitutes a “church.” Neither the fourteen factors—which include regular congregations, regular religious services, and Sunday school for religious instruction of the young—used by the IRS to make this determination nor the “association” test found in recent judicial opinions fit well with Eastern religions that focus more on the individual than the group. As a result of the uncertain state of the law, some Buddhist temples take the position that they are churches exempt from the requirement that they file the Form 990 Annual Information Return, while others file the Form 990 as religious organizations that are not churches. In short, the diversity of beliefs in our society continue to pose challenges, in tax law as in other aspects of American life. Failure to meet this challenge, however, does not in and of itself rise to the level of unconstitutionality.

Public Subsidy

While Hamburger would build on the statement in TWR regarding invidious discrimination to undermine the case’s holding, he sharply criticizes its assertion that tax exemption and the deductibility of contributions to section 501(c)(3) organizations constitute a subsidy justifying a restriction on speech.

For Hamburger, exemption is not a subsidy. He rightly notes that exemption under section 501(c) is not listed on the tax expenditure budget, a list of tax provisions that deviate from normal tax structure and operate like spending programs. That is, the tax expenditure budget treats exemption as inherent in the very structure of the Internal Revenue Code. As Hamburger also acknowledges, the normative basis for the tax expenditure budget is the subject of intense dispute.

Nonetheless, Professor Daniel Halperin has shown that exemption for investment income does operate as a subsidy. Not every section 501(c)(3) organization, in particular not every church, enjoys an endowment. As Hamburger observes, however, some churches do spend from endowment funds. Those that do so benefit importantly from exemption from the income tax.

Hamburger accepts that deduction of charitable contributions represents a government subsidy. He contends, however, that refraining from political activity in order to benefit from the charitable contribution deduction constitutes an unconstitutional condition because the restrictions are not germane and proportionate.

Putting the rules of section 501(c)(3) in the context of the tax treatment of expenses for political activities leads me to question that conclusion. Section 501(c)(3) organizations are not being singled out in this regard. Under current tax law, the cost of political speech is never deductible; all monies for political activities are subject to one level of tax. No provision of the Internal Revenue Code permits individuals to deduct these expenses. Currently, the provision applicable to business expenses explicitly denies a deduction for both lobbying and campaign expenses, including any portion of membership dues used for such purposes. (Admittedly, there was a period of some thirty years, including the year TWR was decided, when businesses could deduct one type of lobbying expenses, those for directly lobbying of legislators and their staffs; that particular deduction ended in 1993.)

Noncharitable exempt organizations that can engage in unlimited lobbying and some campaign intervention, such as section 501(c)(4) social welfare organizations or section 501(c)(6) business associations, have never been permitted to receive tax-deductible contributions. To the extent they intervene in political campaigns, moreover, they must pay tax under section 527(f) on the lesser of their investment income or the amount they spend on campaign activities. Again, the Internal Revenue Code operates so that campaign finance expenditures are subject to one level of tax.

Thus, by ensuring that no tax-deductible funds are used for campaign intervention, the Internal Revenue Code does not disfavor section 501(c)(3) organizations; it treats them in the same way that it treats other entities and individuals. In fact, section 501(c)(3) organizations have a tax advantage others do not receive—they can use tax-deductible contributions to engage in some lobbying.

In theory, then, I differ from Hamburger in that I accept exemption and tax deduction as subsidies, subsidies that help establish and thus fund all the activities of these tax-exempt entities. As a practical matter, however, I share Hamburger’s concern about the impact of these tax rules on many section 501(c)(3) organizations, and in particular on churches. The Court in TWR did not ask or examine the extent to which the organization challenging the statute in fact benefitted from income tax exemption or from deductible contributions. That the group was eligible for such tax benefits sufficed.

Most of those who give to churches, we have long known, do not benefit from the charitable contribution deduction; they are generally among those who take the standard deduction rather than itemize their deduction. Under the 2017 Tax Cuts and Jobs Act, even fewer taxpayers will itemize deductions. The Tax Policy Center predicts that, as a result of the new $24,000 standard deduction, the number of those itemizing their charitable contributions will drop by more than half, from about 37 million in 2017 to about 16 million in 2018. The percentage of itemizers who donate to churches, already small, will likely drop further. Charitable efforts that reflect the idealistic concerns of less affluent taxpayers will suffer.

Conclusion

Unlike Hamburger, my response is not to eliminate the current restrictions applicable to section 501(c)(3) organizations. As I have explained elsewhere, I believe that, as a matter of policy, there are benefits from the current rules and dangers in changing in them. The Johnson amendment has permitted section 501(c)(3) organizations to serve as a nonpartisan sanctuary in our increasingly partisan world. As a result, these groups continue to garner enormous respect from the public. A weakened Johnson amendment would give rise to faux charities, disguised political action committees, formed in order to receive deductible contributions. Their existence would undermine both public trust of charities and our campaign finance regime. For all these reasons, thousands of religious leaders oppose any undermining of the Johnson amendment.

For both constitutional and policy reasons, my solution to the dilemma would be to offer all donors to section 501(c)(3) organizations the subsidy of the charitable contribution deduction. That is, I join those calling for making the charitable contribution deduction (or better yet, a credit) “above the line” so that non-itemizers, including donors to churches, can benefit from it. One calculation estimates that an above-the-line deduction would increase charitable giving by $21.5 billion. Such an approach would not only respond to many of Professor Hamburger’s concerns and recognize charitable giving at all economic levels but would also preserve the benefits of the current version of section 501(c)(3).

-Ellen P. Aprill

Ellen P. Aprill is John E. Anderson Char in Tax Law at Loyola Law School. Before coming to Loyola in 1989, Aprill served for two years in the Office of Tax Policy in the United States Department of the Treasury, and practiced for several years with the law firm of Munger, Tolles & Olson in Los Angeles.