By: Philip Hackney
On Monday Ben Leff made some good points about illegality and charitable organizations that critiqued my post on a recent IRS denial of an organization that planned to distribute marijuana. I am excited to be able to engage on this issue here on our new effort at consolidated blogging. Ben makes one primary point: “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.” He also makes a couple ancillary points on (1) the proper interpretation of the Religious Freedom Restoration Act (“RFRA”), and (2) whether the IRS should have avoided ruling on the issue of marijuana at all in its most recent denial. I will address the primary point first and then turn to the two ancillary points.
I agree that in general the IRS should not make choices about illegality that are not within the IRS’s jurisdiction. For instance, the IRS should not make a judgment that an organization is engaged in illegal behavior, and therefore not charitable, based on its belief that the organization might be in violation of antitrust laws in a criminal way. The IRS simply has no way of generating the proper evidence nor of properly evaluating any evidence it does generate. Until the FTC makes a ruling on the legality of the conduct, the IRS should focus on charitable tax law and whether the acts themselves fall outside of charitable organization behavior in a substantial way.
Now, this example avoids Ben’s main claim here. Ben makes the more significant claim that even where the conduct is “facially illegal” the IRS should hesitate to use the public policy exception. Ben says: “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.” (emphasis added).
I disagree and I emphasize a part of Ben’s claim above because I think it might highlight where Ben and I differ: “prevent the illegal conduct.” I don’t think denying charitable status has anything to do with punishing conduct or preventing illegal conduct. Charitable status simply provides certain tax benefits that may aid an organization. Denying the organization that status does nothing, not one iota, to prevent that activity in any way.
I believe charitable tax status is there to encourage and recognize those activities that we find as a society enhance our public community in some way. Where something is facially illegal I believe the IRS has a very strong and absolutely applicable statement from our democracy about something that explicitly does not aid our public community. It is an activity that does just the opposite. It is an activity that facially furthers a purpose that is not charitable. While I may have an occasional problem with the application of the illegality doctrine, I indicated in my prior post that on the whole I am OK with this system because it provides certainty in the application of the law and does seem to be our society speaking very explicitly on a particular matter. Therefore, when an organization facially violates the law as is the case with an organization that expressly tells the IRS that it intends to distribute marijuana, I believe the IRS has no choice but to deny charitable status. And it should deny that status not to stop the organization from engaging in the illegal act, but because the organization does not meet the requirement of charitable.
Consider an organization that says it plans to commit murder to further some purpose we would all agree is charitable. I don’t think the IRS needs to wait for the relevant authorities to enforce the law against murder to deny the organization charitable status. The same would go for stealing. The IRS does not need to wait for anyone else to make a determination that this activity is not charitable.
Now, that still leaves us with the two points I consider ancillary. First, Ben notes that my claim that it is absolutely clear that the Cannabis Church gets exemption because of RFRA is not as clear to everyone else as I suggest. He points to the fact that Indianapolis police are threatening the Cannabis church with arrest and more significantly that the 9th Circuit seemed to believe that RFRA did not apply to protect from criminal prosecution a Native American church that planned to use marijuana as a sacrament. His point here is that there is a lot more of a standard rather than hard and fast rule involved in applying the public policy/illegality doctrine than I suggest.
To this claim I would suggest that RFRA is a different beast altogether. While not technically a constitutional matter, it is very close to one. Once we bring in RFRA we are no longer just talking application of the public policy/illegality doctrine. The IRS necessarily has to take it into consideration in applying charitable tax law.
I made the claim that the IRS decision in the Church of Cannabis case was a foregone conclusion because I believe that RFRA was enacted at least in part to ensure that sacramental drugs could be used in religious ceremonies. Although the following link is from Wikipedia it expresses a very well-known opinion that Employment Division v. Smith, 494 U.S. 872 (1990) led to the Congressional enactment of RFRA. In Smith, the Supreme Court upheld a decision to deny unemployment benefits to Native Americans who used mescaline as a sacrament in their religion. After enactment, SCOTUS again affirmed this notion that RFRA provided protection that the Free Exercise Clause did not in Gonzales v. O Centro Espirita Beneficente Uniao do Vegetal where SCOTUS found that RFRA prevented the government from enforcing laws preventing the possession of a Schedule I substance when that substance was used by a Brazilian church as a sacrament. To me those authorities seem sufficient to lead to the conclusion that if in fact the Cannabis Church is acting on its sincerely held religious beliefs and not engaging in the distribution of marijuana outside that context, neither the IRS nor any other authorities can infringe on that group’s religious liberties unless it meets a very difficult burden of proving a compelling governmental interest and utilizes the least restrictive means. I have not yet read the 9th Circuit opinion to which Ben refers, and I need to, but it strikes me as odd given the other authorities involved. Given this is a blog post, I will save consideration of that particular case till another time.
Now, Ben is certainly right that there are any number of laws that may overlay the determination of whether something is illegal, both procedural and substantive. However, I don’t think the IRS needs to wait in the case of facially illegal conduct to deny status. It denies the organization no property right and simply applies a common sense rule that gives taxpayers certainty in the application of the law.
Finally, Ben suggests that the IRS should try to make its holding on grounds other than public policy illegality where it can. I think on the whole that it is better if the IRS provides certainty on the issue of illegality rather than wait around. It is important in a procedural sense too. The IRS could lose on the other grounds and if it fails to raise the illegality claim it may lose it altogether. Thus, I think it needs to deny on the public policy illegality claim if it plans to make it. This makes the law clearer and cleaner for all.