By Benjamin Leff
Last Friday, Phil Hackney posted on this blog about IRS Denial 201615018 (4/8/16), in which the IRS denied tax-exempt status under section 501(c)(3) to an organization that planned to support the cultivation and distribution of medical marijuana in a state in which such activities were legal. As Phil pointed out, the IRS held, among other things, that an organization whose purpose is the distribution of marijuana cannot be tax exempt under section 501(c)(3) because “a section 501(c)(3) organization cannot be created for a purpose that is illegal.” This position is not new. The IRS took a similar position way back in 2012.
Phil and I pretty much agree about the law. We both think that the IRS is probably right that under current law an organization whose charitable purpose includes engaging in illegal activities does not qualify for tax-exempt status under section 501(c)(3). Phil says that the law is “absolutely clear on this front,” which I think is a little bit of an overstatement, but that’s a quibble at best. The reason for this certainty is that the United States Supreme Court has held that an organization that had racially discriminatory admissions or dating policies could not qualify for tax-exemption under the so-called public policy doctrine, a common-law doctrine that applies to charitable trusts. The argument for denying tax-exemption for illegal activities is a part of the public policy doctrine, the rationale being that nothing more clearly defines a jurisdiction’s fundamental public policies than its laws, and so illegal activities must violate public policy.
Phil and I also agree on the “enforcement approach” that should ideally underlie the public policy doctrine. We agree that when the IRS is called upon to apply the public policy doctrine, it should do so according to the brightest possible lines. It should maintain “hard and fast” rules. That is because the room for abuse is so great in this area, since the suspect organizations are almost always advancing unpopular or counter-majoritarian values.
Where Phil and I disagree is whether “illegality” provides an adequately bright line to satisfy this enforcement approach. I think that even where conduct is facially “illegal,” there is ambiguity about whether it violates a fundamental public policy, and the IRS should hesitate before making a decision on that score. When it errs in applying the public policy doctrine, it should always err in favor of the organization. That is because when an organization’s conduct is illegal, there is always another enforcement entity that is empowered to enforce the law and prevent the illegal conduct. The IRS should grant tax-exempt status and then defer to the substantive enforcement entity to use whatever sanctions are at its disposal to enforce the law … if it chooses to do so.
Phil’s own example does a pretty good job of illustrating this point. Phil mentioned that he thinks that the IRS was “certainly right when it found the Church of Cannabis charitable.” That is because “[t]he Religious Freedom Restoration Act makes that a foregone conclusion.” The First Church of Cannabis is a religious organization located in Indianapolis, Indiana, that uses marijuana as a sacrament. Marijuana is illegal for all uses under both Indiana and Federal Law, with no statutory exception for religious uses. However, both the federal government and Indiana have so-called Religious Freedom Restoration Acts (“RFRAs”). REFRAs mandate that governments cannot substantially burden a person’s religious exercise unless doing so is the least restrictive means of furthering a compelling government interest. Presumably, Phil’s point is that marijuana use is not illegal when it is a sacrament administered by the Church of Cannabis because both the Indiana and Federal governments are required by their RFRAs to read a “religious use” exception into their otherwise applicable marijuana laws.
However, Phil goes too far when he argues that this interpretation of law is “a foregone conclusion.” The Indianapolis police and prosecutors certainly didn’t agree with him. The prosecutor “announced that [Indiana police] officers will be present for the inaugural service [at the First Church of Cannabis]…. Anyone caught in possession of marijuana will be subject to arrest.” Following the announcement, the First Church of Cannabis decided not to administer its sacrament at its inaugural worship service. It subsequently filed a lawsuit that is currently pending, alleging that the prosecutor and police violated its rights under Indiana’s RFRA. I am no expert on religious liberty, but I think it’s fair to say that the outcome of that lawsuit is uncertain. The 9th Circuit Court of Appeals, for example, just upheld a motion for summary judgment against a native American church that uses marijuana as a sacrament, holding that the Federal RFRA does not create an exception to criminal sanctions for marijuana use because “no rational trier of fact could conclude on this record that a prohibition of cannabis use imposes a ‘substantial burden.’” Why? Because members of the church admitted that peyote works as well as cannabis in their rituals.
In other words, what is “illegal” with respect to marijuana is by no means a “bright line,” at least in some contexts. I would argue that the blurring of that bright line does not only exist with respect to religious uses of marijuana, but also in all marijuana use that is legal at the state and local level, but still illegal at the federal level. Yes, of course the Controlled Substances Act is facially clear that marijuana does not promote health, and yes, the CSA is clearly the law of the land. But the enforcement decisions made by federal agencies like the D.O.J. are also evidence that discerning the “fundamental public policy” with respect to marijuana is not so easy, and mere facial illegality does not create a truly bright line. If the CSA implies that marijuana prohibition is a fundamental public policy, so too is federalism a fundamental public policy. Empowering people through civic and nonprofit organizations to advocate for changes of law and even to engage in civil disobedience is another fundamental public policy. The nonprofit sector, or really any portion of society that is neither government nor business, has a central role in our experiment with democracy. And the IRS would be well-advised to tread as softly as possible when denying tax-exempt status to organizations because they violate governmental policies, even when those policies are enshrined in law.
By the way, Phil’s post has an addendum: he notes that even if marijuana selling were legal, it’s not clear that an organization that facilitates its sale has a proper charitable purpose. While “promotion of health” is a charitable purpose, it has long been understood that stand-alone pharmacies do not qualify for tax-exempt status, even though they provide medicine. An organization that facilitated the provision of marijuana would have to make a more compelling case that its activities were charitable, and the facts described in Denial 201615018 fail to do so. Likewise, the Denial itself references the fact that the organization is operated for the “private benefit” of its members, which is another ground for denying the organization tax-exempt status under section 501(c)(3). The IRS could well have rested its argument on these grounds and not mentioned the public policy or illegality doctrine at all. In my view, that would have been a better choice. The IRS EO Division does have expertise about proper charitable purposes and the private benefit doctrine (to the degree that such things are well enough defined that there is such a thing as expertise, which I question). Therefore, it should feel more free to apply those doctrines than to deny tax-exempt status under the public policy doctrine, which forces it to infer the fundamental policies of other jurisdictions or agencies.