By: Philip Hackney
In 2014, a District Court dismissed (based on 12(b)(6) and 12(b)(1) motions) the complaint of a number of conservative organizations who alleged that the IRS “targeted” them by subjecting them to greater scrutiny in their applications for tax exemption. The lead organization, True the Vote, sought 501(c)(3) charitable organization status; the others primarily sought 501(c)(4) social welfare organization status. The world became aware of this targeting controversy in May 2013 when Lois Lerner, the head of the Exempt Organizations division of the IRS apologized to the Tea Party and other conservative groups for how the IRS treated their applications. To this day Taxprof Blog continues the IRS Scandal post over three years later dedicated at least in part to this controversy.
The primary complaints were the second and fifth claims: (2) the IRS violated the organizations First Amendment rights to freedom of speech, and (5) the IRS violated the Administrative Procedures Act. The District Court concluded that because the IRS had granted exempt status to these organizations, the complaints were moot. True the Vote appealed this dismissal to the DC Circuit Court of Appeals.
Last week the Circuit Court breathed new life into claims 2 and 5. Though the Court found that some of the complaints were moot (including Bivens complaints against IRS employees and a claim of violation of 6103 disclosure rules), it allowed claims 2 and 5 forward because it found that the IRS had not voluntarily ceased its unlawful actions.
In reading the opinion, I find astonishing that the Circuit Court appears to have already concluded, without trial, that the IRS acted unconstitutionally. I recognize that for a 12(b)(1) motion the court is to assume the complaint true, but the court appears to have done much more than make assumptions. I focus on this issue.
Frankly a trial testing this situation seems to me the right thing for two reasons. First, many people in our country genuinely believe the IRS behaved unconstitutionally (as is evidenced by the continuing coverage given in places like Taxprof Blog). Second, the IRS failed numerous organizations in how it processed this group of applications that touched on First Amendment issues. These two factors suggest to me that the organizations involved deserve a real hearing and not just a pre-trial dismissal.
What worries me is that the DC Circuit Court judges appear to have already judged the case; I find that as problematic as what the DC Circuit Court judges find problematic in the IRS actions at issue. Remember, the issue before the appeals court is a 12(b)(1) motion to dismiss for lack of subject matter jurisdiction because the IRS had approved the applications for tax exemption and there was no case to be decided by the court. Thus, no one has presented evidence or law in a trial on the substantive issues before the court. The court is to take the allegations as true for purposes of the motion but should give those claims close scrutiny. The DC Circuit though seems to do much more than assume the complaint is true.
The court starts its opinion stating: “Instead of processing these applications in the normal course of IRS business, as would have been the case with other taxpayers, the IRS selected out these applicants for more rigorous review on the basis of their names, which were in each instance indicative of a conservative or anti-Administration orientation.” Later in the opinion it continues: “It being plain to the Inspector General, the district court, and this court that the IRS cannot defend its discriminatory conduct on the merits, the governing issue is now whether the controversy is moot.” There is a lot of nonsense in those statements.
Because I don’t believe that the IRS failed by using names to screen applicants nor in picking out the conservative groups’ applications for closer scrutiny (as I discussed in an article called Should the IRS Never ‘Target’ Taxpayers), and I don’t believe any credible evidence has been put forward establishing that IRS employees acted with any intent to harm conservative causes, I feel like I am living in bizarro world to read a US appeals court opinion that states without a trial fairly establishing the law and facts that the these actions violated the constitution. I will take a look at separate parts of the statements to explain what I mean.
(1) “Instead of processing these applications in the normal course of business, as would have been the case with other taxpayers . . .”:
It is incorrect to claim that the IRS processed these applications out of the normal course of business. Such a claim would have to be backed by information that the IRS never applied deep scrutiny to any other organizations. You can read my above cited article for greater detail on the IRS process, but while the IRS has regularly allowed many applications to fly through, it has applied scrutiny to other applications depending on the challenge that the application presents. Applying greater scrutiny to a group of organizations, asking more questions of a group of organizations was not and is not at all out of the normal course of business.
Nor should we at all be surprised that the IRS applies more scrutiny to some than to others. The IRS is a large organization, but compared to its monumental task of overseeing the acts of all individuals and both entities in the US, it is tiny. It cannot possibly put the proper amount of attention into every single matter that comes before it. It thus summarily processes many items and does not for others.
(2) “the IRS selected out these applicants for more rigorous review on the basis of their names, which were in each instance indicative of a conservative or anti-Administration orientation.”
This is the rest of statement discussed above. To be fair, I must examine this part of the statement which relates back to the first. This part of the statement in one sense is undeniably true. The IRS selected some applications to receive more scrutiny based on name (in part). However, the implication of the sentence is that the IRS does not and should never select by name. Furthermore there is a claim too that it should never select by name based on ideological affiliation.
Because I spent a lot of time dealing with each of these claims in my much longer paper, I refer you to it, but there is no law that states such a limitation on the IRS, nor should there be. The Inspector General, who the DC Circuit relies upon here to great extent, never set forth any law that applied to prevent the IRS from using names for the selection process. It only cited a motto of the IRS that it should be impartial in its application of the law. That is the not the rigorous evidentiary and legal work that we all deserve in assessing whether justice has taken place or not. Both the DC Circuit and the Inspector General do to the IRS effectively what they are chastising the IRS for doing: jumping to legal conclusions based on surface appearance. This is unfortunate.
The claim that the only reason these organizations were selected was because of their name is a false one. The IRS unfortunately gave the claim some legitimacy by apologizing for selecting cases by name. The law regarding both charitable organizations and social welfare organizations prohibits some level of political campaign intervention. Organizations with names that suggest they are part of a political party should be looked at closely by the IRS to ensure they are not acting too politically. The IRS appears to have pulled these organizations because the organizations looked to be involved in too much political activity, and their name was indicative of that. No investigation yet has suggested that the IRS pulled organizations with a conservative affiliated name in order to target those groups for their beliefs. The IRS appears to have pulled those organizations because it believed the conservative groups might not be complying with the law and might not deserve tax exemption.
In running the application process, once the IRS has identified a couple of problematic organizations that are related in name or idea or organizer, it is often important that the IRS take a look to see if there are other similar organizations out there operating similarly. For instance, assume that the IRS had found an Islamic charity was engaged in terrorism. If the IRS failed to pull other organizations using similar names or organizers, we would have a different scandal on our hands. Pulling by name ensures you pick up all such organizations. The Tea Party organization were in many instances cookie cutter type organizations. Pulling them by name made sense in an effort to ensure like organizations were treated in a like manner.
Effectively, what the plaintiffs are arguing is a case of selective enforcement. I discussed what needs to be shown in my article (p. 492) to make such a claim in a tax case: “In Penn-Field Industries, Inc. v. Commissioner, the Tax Court held, consistent with the principle stated by the Supreme Court in Oyler, that a taxpayer must prove: (1) that other similarly situated taxpayers were not selected for audit for the same reason; and (2) that this discriminatory selection was based on race, religion, or based on the desire to prevent constitutional rights.”
Neither factor can be established in this case.
As to the first factor, other taxpayers were selected for scrutiny (audit for our purposes) for the same reason (too much political activity) and endured the same questions and delay. While most were conservative, there is no evidence that this does not reflect the actual cases before the IRS at the time rather than some explicit bias.
As to the second factor, the plaintiffs would have to prove some desire to prevent constitutional rights such as freedom of speech or political association. No investigation has demonstrated this so far. Not the inspector general and not the congressional investigations and not the FBI. Furthermore, the IRS delay on these applications did nothing to stop these organizations from speaking or organizing. The only question was their actual tax status, not whether these organizations could say what they wanted to say.
(3) “It being plain to the Inspector General, the district court, and this court that the IRS cannot defend its discriminatory conduct on the merits, the governing issue is now whether the controversy is moot.”
This is the statement I find the most offensive, for reasons discussed in part above. There has been no trial and the court is concluding that the IRS is guilty and cannot defend its conduct on the merits. Under this vision, the IRS’s only hope is its 12(b)(1) motion that this court rejects. I have read the Inspector Generals report and conclusions and the memorandum of the district court, I don’t see where either the IG or the district court make such a blanket unsubstantiated legal conclusion that the IRS cannot defend its “discriminatory conduct.” I have read the District Court opinion and find that it constantly refers to the plaintiff’s claims as allegations. It makes no conclusions regarding the supposedly “discriminatory conduct.” Obviously this court believes that, but has done none of the hard work to support such a final conclusion.
Finally, at this point all but two organizations have received tax exemption. And, the two upon which there is no resolution are in court such that the plaintiffs are going to get to challenge the alleged violation in their particular circumstance. As the District Court notes the fact that these organizations have been granted exempt status suggests that the alleged harm is eliminated if there was harm.
I am not claiming that there was no failure on the part of the IRS. There was. It should have been more careful in how it used names that touched on rights to speech and association. This failure though was not a legal one, but an ethical one.
Perhaps the court’s opinion is nothing but dicta except for the holding that the case is not moot. But it is not at all clear that this is the way this opinion will be used. It is fine if the DC Circuit Court wants to see this case go forward, but it should let this case go forward without judging the case before it hears any evidence or law in a trial. The IRS, just like the conservative organizations, deserves to be treated with respect and fairness.