What Would Happen if the Johnson Amendment Were Repealed?

By Benjamin Leff

Donald Trump recently repeated his campaign promise to “totally destroy” the Johnson Amendment. The Johnson Amendment is that portion of Section 501(c)(3) of the Internal Revenue Code that forbids tax-exempt charities (including most churches) from “interven[ing] in … any political campaign on behalf of (or in opposition to) any candidate for public office.” Only Congress can change the Tax Code, and, as Daniel Hemel recently pointed out, congressional Republicans just re-introduced the Free Speech Fairness Act, a bill to permit some limited campaign-related speech by the leaders of 501(c)(3) organizations, including churches. I’ve written previously in support of this legislation as an “adequate solution” to provide a little extra wiggle room to protect the speech rights of charities without making significant changes to the way campaigns are currently financed. Hemel points out that the Free Speech Fairness Act doesn’t come close to totally destroying the Johnson Amendment, but is more like a “de minimis carveout.”

But, rather than talk about the relatively sensible Free Speech Fairness Act, I want to predict what would happen if Donald Trump actually succeeds in “totally destroying” the Johnson Amendment. In other words, what would happen if Congress simply repealed the portion of section 501(c)(3) quoted above?

Because a charity must be organized and operated primarily for charitable purposes (although the word used in the statute is “exclusively”[1]), and intervening in campaigns is not a charitable purpose, new charities could not be created for the purpose of engaging in campaign speech or making political contributions. But existing charities could divert a significant quantity of their funds to political campaigns if they so chose. The question of how much is hard to answer without new guidance, but it would be plausibly reasonable (though aggressive[2]) for a charity to make 49% of its expenditures in any year as campaign contributions, since that leaves 51% of its activities to satisfy the requirement that it is engaged “primarily” in activities that accomplish its exempt purposes.

How would that change the way campaigns are financed in the US? Well, if people could find charities willing to accept their contributions and then spend them on political contributions, taxpayers could transform political campaign contributions from nondeductible expenditures to tax-deductible charitable contributions. This would work for corporations as well as individuals. The charities would then have to limit their political spending to 49% of their overall spending. The charities best suited for this type of intermediation of campaign spending are large existing public charities.[3] For example, a university, like the one I work for, could choose to make political contributions on behalf of its donors, if it wanted.

If I were involved in fundraising at my university, I would immediately suggest that it create a fund called the Alumni for Kamala Harris for President Fund and the Alumni for Paul Ryan for President Fund (just a guess for 2020). For every tax-deductible contribution of $100 to the fund, $60 would go to the candidate or to an independent PAC that supports the candidate, and $40 would go towards scholarships at the University. There are some legal issues that the University would have to maneuver to make this program work, and there might be some blowback from stakeholders who were upset about the University getting involved in politics, but the program would not be illegal or impossible.   As discussed below, for donors in the 39.6% tax bracket, a tax-deductible contribution of $100 costs about the same to them as a non-tax-deductible contribution of $60, so why not send $40 to scholarships at your alma mater, if it’s free (or, technically, paid for by the government)?

In the 2016 presidential election, total spending by Hilary Clinton, Donald Trump, the Democratic and Republican parties, and all Super PACS was just over $2 billion. There are almost certainly enough public charities in this country that would be tempted to raise funds in the manner described above that all $2 billion could be funneled through them, making all campaign spending tax-deductible for the donor.

So, would that be good or bad? Obviously, it has very little to do with whether churches or their leaders can or cannot endorse candidates from the pulpit. The question is whether it would be good or bad policy to permit all campaign contributions — whether to candidates directly or to independent PACs or political parties — to be made on a tax-deductible basis. Generally, a tax deduction functions like a government subsidy. On the one hand, subsidizing all campaign spending doesn’t seem so bad. Campaigns are important for democracy; why shouldn’t the government subsidize them? Under current law, the playing field is made level by denying tax deduction to everyone who makes a political contribution or spends money to elect a candidate. At first glance, it seems like the playing field would be equally level if everyone gets a tax deduction for similar spending. As long as everyone is treated the same, it seems like a fair system.

But everyone is not treated the same when political campaign contributions and campaign spending is tax deductible. First of all, most political campaign contributions are made by very wealthy taxpayers, and so subsidizing political spending is a subsidy for the wealthiest taxpayers. For example, the conservative Koch brothers were reported to have planned to spend almost 900 million dollars in the 2016 presidential election. The liberal donor Thomas Steyer reportedly spent over 86 million dollars. Even if the government subsidized such spending in an equal way, say 10 cents for every dollar spent, this subsidy would be unfair. The government would magnify the Koch brothers’ voice by 90 million dollars, Steyer’s voice by 8.6 million dollars and most Americans voice by nothing or almost nothing, simply because they make small contributions. Most people would think that even a subsidy that was delivered proportional to spending would probably be bad policy.

But a tax deduction is not proportional to money spent, because our Tax Code is not proportional. Tax deductions (including the deduction for charitable contributions) treat wealthier donors better than less wealthy donors. First, deductions for charitable contributions are only available to taxpayers who “itemize” their deductions. Under the current income tax system, 70 percent of taxpayers do not itemize; instead they take the standard deduction or do not owe any tax. If you take the standard deduction, your taxes remain exactly the same whether you make charitable contributions or not. If campaign contributions could be deducted like charitable contributions, then non-itemizers would not have any tax benefit from making campaign contributions, while itemizers would. Itemizers are disproportionately found among the highest-income taxpayers.

Second, the amount of benefit one receives from a deduction is equal to one’s marginal tax rate. Since tax rates are progressive, that means that higher-income taxpayers get more benefit from deductions than lower-income taxpayers. For example, single taxpayers who have taxable income over $415,050 pay tax at a 39.06% rate on their income that exceeds that threshold. That means that the ability to deduct a political contribution is worth 39.06 cents for every dollar contributed. It is like a federal subsidy of almost 40 percent to wealthy political donors. For single taxpayers (who itemize) with taxable income under $9,275, the comparable subsidy is only 10 cents for every dollar contributed. That’s what tax scholars generally call an “upside down” subsidy.

So, not only is deductibility a government subsidy for political spending that would go disproportionately to wealthy taxpayers, it would go to them in disproportionate amounts, providing a greater subsidy per dollar contributed to wealthier taxpayers than to less wealthy ones. It’s hard to imagine that there are many people who would interpret that dramatic tilt of the playing field in favor of wealthy donors a good thing. Not even Trump could sell a policy like that with a straight face.

[1] See Treas. Reg. 1.501(c)(3)-1(c)(1)(“An organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501(c)(3).” emphasis added.)

[2] It’s an aggressive position at least in part because the second sentence of Treas. Reg. 1.501(c)(3)-1(c)(a) states, “An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.” A lot of negatives in that sentence, but it appears to interpret the opposite of “primarily” as “an insubstantial amount.” The idea that 49% of an organization’s activities is “an insubstantial part” is an aggressive position, to say the least.

[3] This post has been modified from its original form. It was originally published proposing that donor-advised funds would be the simplest vehicle for making tax-deductible campaign contributions. But, thanks to post-publication feedback about the likelihood that such use of donor-advised funds would still be improper even after a full repeal of the Johnson Amendment, I have changed the proposed vehicle for tax-deductible campaign contributions to existing public charities that are not donor-advised fund hosts.

More on Hate Groups and Tax Exemptions [Updated]

On the Cooking the Books Podcast, Phil Hackney and I discussed Michael Kunzelman’s story (that we both spoke to him about) on white nationalist groups that are tax exempt. Over at the Volokh Conspiracy, Eugene Volokh asserts that the IRS cannot constitutionally deny tax exemptions to “hate groups” based on their views, abhorrent that they may be.

Since he name-checks me and fellow Surly blogger Phil Hackney, I figured it was worth responding to his piece. (It’s worth noting that we’ve generated a fair amount of Twitter discussion already; you can catch that in a number of threads, including this one and this one.)

I don’t intend to be comprehensive here, but I want to make five main points:  Continue reading “More on Hate Groups and Tax Exemptions [Updated]”

Rockefellers, Pratts and Private Cemeteries

By: David J. Herzig

The New York Times wrote about the Pratt Family burial plot. As Daniel Hemel pointed out there was also a tax story; apparently, the cemetery qualifies as a 501(c)(13) tax-exempt entity. So, when you combine tax and a Cleveland company, I was fascinated by the story. [1]

Because the cemetery is tax-exempt under section (c)(13), it can only benefit its members. This is contrary to the general rule for tax-exempts that you benefit everyone as opposed to just members. The question that the IRS had to address was how discriminatory could the cemetery be.  For example, whether both the Rockefellers and the Pratts could be buried in the cemetery. According to Daniel’s review of the rulings and regulations, “the Pratt family cemetery won’t lose its tax exempt status if it excludes the Rockefellers (or any other non-Pratts) from being buried there. But the family cemetery need not limit membership to Pratts in order to maintain its tax exemption.” All of which is true.

But, I wondered why does the family care so much about maintaining the tax exemption. I started to dig around to find the 990s of the cemetery. What if the tax-exemption were terminated? (As a certain President Elect has come to decide – sometimes the maintenance of tax-exempt entities are more trouble than they are worth).

Continue reading “Rockefellers, Pratts and Private Cemeteries”

Does the IRS Permit Churches to Endorse Candidates Through an “Alternate Channel”?

By Benjamin Leff

While we’re all waiting for one of my co-bloggers to say something smart about this, I thought I’d say a little more about campaign intervention by 501(c)(3) organizations.

Brian Galle asks by tweet, ” can we have a cite for the claim that a church cannot electioneer through a c(4)?”  In a prior post, I said, “The short answer is that IRS guidance on campaign intervention differs from its guidance on lobbying because it denies 501(c)(3) organizations who want to endorse candidates the ‘alternate channel’ that is provided for lobbying. And therefore current guidance is unconstitutional.” But I didn’t explain that claim. Furthermore, the D.C. Circuit Court seems to disagree with me, since it stated in the leading case on campaign intervention by a 501(c)(3) organization: “the Church can initiate a series of steps that will provide an alternate means of political communication that will satisfy the standards set by the concurring justices in Regan.”  So, here’s my justification for claiming that the IRS’s guidance is insufficient: Continue reading “Does the IRS Permit Churches to Endorse Candidates Through an “Alternate Channel”?”

Why the Constitution Protects Churches’ Right to Endorse Candidates

By Benjamin Leff

Last Sunday was Pulpit Freedom Sunday. With all of the speculation over Donald Trump’s tax strategies (personal and charitable), and then the publishing of the video showing Donald Trump saying terrible things, my Twitter feed had very little to say about pastors endorsing candidates from their pulpits. In fact, the news coverage has been surprisingly slim. But, all that notwithstanding, I thought I’d take the opportunity to finally explain why I think that the law does not prohibit pastors of tax-exempt churches (or leaders of any other 501(c)(3) organization) from communicating an express endorsement of a candidate in a regular meeting of the organization. I’ve mentioned this position in a number of previous posts here and here (and annoyingly to them I’m sure, on my friends’ Facebook feeds) and keep linking to a 2009 article I wrote on the topic. But who wants to read that?  The dominant argument against me appears to be that churches are free to endorse candidates or be tax-exempt, but not both, and forcing that choice is not a Constitutional problem.  But that argument is not an accurate description of the law, as I understand it (although, of course, I have to caveat that I’m a tax guy, not a Constitutional law scholar). Continue reading “Why the Constitution Protects Churches’ Right to Endorse Candidates”

Trump’s Abuse of Trump Foundation — Criminal Tax Implications?

 

By: Philip Hackney, Oct. 3, 2016

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Much attention is being paid to how Donald Trump could have amassed a $900 million NOL in the mid 90s. I remain laser-focused on the Donald J. Trump Foundation.  For this blog post I ask the question: could Mr. Trump’s misuse of the private foundation that he leads result in criminal sanctions under tax law?

I think there is enough evidence to open a criminal investigation into his activities. Nevertheless, a criminal prosecution is highly unlikely for both political reasons and issues of proof (ignorance of the law is a defense). Still, I think the IRS has a duty to open an investigation under the egregious set of facts I lay out.

Here is the important thing to keep in mind as you consider the arguments I lay out in this post: Donald Trump does not own the Foundation and its property does not belong to him. It does not matter from whom the money came. He is the president of a nonprofit organization that is entrusted with money to be used for charitable purposes that benefit the public. Continue reading “Trump’s Abuse of Trump Foundation — Criminal Tax Implications?”

Trump, Churches, and Politics – Counterpoint

By Benjamin Leff

A few days ago, my good friend and fellow Subgrouper, David Herzig, wrote a post about Donald Trump’s appearance at a church in Flint Michigan, the Bethel United Methodist Church. Herzig argued in his post (and on Twitter) that the interruption of Trump’s attacks on Hilary Clinton by the church’s pastor, Rev. Timmons, was necessary to protect the church from violating the prohibition on campaign-related speech by churches (and other charities). He also quoted Professor Lloyd Mayer’s tweet on the topic, arguing that the church could have violated the prohibition simply by permitting Trump to speak at all, regardless of the topic. I lamely tweeted back that the short video that had been released failed to provide sufficient facts to make a determination about whether the church violated the law or not. I want to say more about the law and the IRS’s current interpretation of the law to supplement Herzig and Mayer’s valiant efforts, since I think I have a slightly different view on the issue than either of them.

The most important point is that the Constitution protects all churches’ right to engage in speech (as well as religious practice). Statutory law — including the prohibition on campaign intervention (sometimes called the “Johnson Amendment”) — does not (could not) interfere with those very basic and fundamental rights. In my view, the IRS’s interpretation of the law gets some things a little bit wrong, but even its interpretation is extremely permissive of speech that takes place in churches and other charities in deference to their very real speech rights.

So, what’s the law with respect to hosting a political candidate at a church or other charity (including, by the way, a university)? Is it the case that any appearance by a known candidate at any event hosted by a 501(c)(3) organization is a violation of the law? Continue reading “Trump, Churches, and Politics – Counterpoint”

Trump, Churches and Politics

Photo: Evan Vucci/AP

By David J. Herzig

One of the leads in today’s news cycle was the Flint Pastor, Rev. Faith Green Timmons of the Bethel United Methodist Church, interrupting Republican Presidential Candidate Donald Trump during a speech at her church.

According to the story, Rev. Timmons, intervened during Mr. Trump’s speech  when he started attacking Democratic Presidential Candidate Hillary Clinton stating, “Mr. Trump, I invited you here to thank us for what we’ve done in Flint, not give a political speech, …”. To which Mr. Trump responded, “OK. That’s good. Then I’m going back onto Flint, OK? Flint’s pain is a result of so many different failures, …”.

I headed to Twitter to state that Rev. Timmons was doing the right thing protecting her churches charitable exemption by halting the political speech.  Quick blackletter law: churches, like other public charities, are exempt from tax under section 501(c)(3). But like all exemptions there are certain limitations, including an absolute prohibition on supporting or opposing candidates for office.  In IRS Publication 1828, the IRS position is clear,  “churches and religious organizations, are absolutely prohibited from directly or indirectly participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for elective public office.”  (For a primer on the topic, my co-blogger Sam Brunson wrote for Surly here and for a full blown analysis see his work for University of Colorado’s law review here).  Churches can’t (although they often do) engage in political speech.  Maybe Rev. Timmons was attempting to protect the church’s exemption.

However, as Lloyd Mayer pointed out on Twitter, having a candidate appear at your church two months before the election might in itself be political speech regardless of the topic actually discussed.  This would be true unless the church gave the same amount of “air time” to the opponent.  Publication 1828 supports Professor Mayer’s view.  Statements made by the religious leader of the church at an official church function or through use of the church’s assets would be improper political campaign intervention.  Hosting only one candidate regardless of the topic would seem to be an endorsement of that candidate and thus improper political campaign intervention.

Continue reading “Trump, Churches and Politics”

Trump Pays $2,500 Excise Tax: Is that Enough?

By: Philip Hackney

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A couple of months ago, I wrote about the tax consequences of the Donald J. Trump Foundation paying $25,000 to the Pam Bondi campaign for attorney general in Florida in 2013. While most folks are focused on whether the payment was a bribe, I still see signs of a mismanaged charitable organization. I suggested that the political contribution could lead to the Foundation losing its exempt status and should require it to pay some excise taxes. I also said that there was enough questionable information for the IRS to open an audit of the Foundation. Well, last week, David Fahrenthold reported that Donald Trump recently paid $2,500 to the IRS as a tax for that impermissible political contribution made by the Foundation. This action leaves a lot of odd unanswered questions that I write about here.

Jeffrey McConney, the senior vice president and controller of the Foundation, told the Washington Post that Trump himself filed paperwork with the IRS alerting them to the improper political contribution from the Foundation, paid a 10% excise tax, and returned the $25,000. McConney states that the Foundation believes this should end the problem because the Foundation has done everything it has “been instructed to do”. While some have assumed that the IRS had communicated with the Foundation, it is not clear who did the instructing. Continue reading “Trump Pays $2,500 Excise Tax: Is that Enough?”

LA Flood Disaster: Links on Government Aid & Where to Donate

By: Philip Hackney
14021650_1231410703559771_2524920277260321497_n (1)I live in Baton Rouge, LA where I teach at LSU Law Center.  Baton Rouge and surrounding communities are currently experiencing unprecedented flooding. The devastation stretches from around the Louisiana-Mississippi border all the way over to Lafayette -maybe 100 miles across. This story does a nice job explaining the weather phenomenon that caused this massive flood event. Neighborhoods that have never flooded before in our recorded history are under 4 -6 ft. of water, and some higher than that. Almost the entirety of certain cities are submerged. The last data I had for my area is that 20,000 were displaced and 10,000 in shelters. I expect that number to go up over the week. Even though it has stopped raining, the flood waters cannot drain because the rivers are too high and cannot take runnoff from tributaries. I am fortunate to live in a house that has been spared from this devastating water. The picture on the left is of Gonzales City Hall underwater.

This is just a quick post on some resources for navigating the legal benefits of a disaster. I highly recommend the tremendous article by my fellow blogger Francine Lipman entitled Anatomy of a Disaster Under the Internal Revenue Code.  It discusses all of the income tax impacts of various benefits that you might apply for and receive. In many cases the Code excludes amounts you receive in disasters. The two most significant probably are gifts you might receive from family and friends. Those are excludable under 102 of the Code. More significantly, benefits from the government will often be excluded as qualified disaster relief payments under section 139 of the Code. The fact that President Obama declared this a disaster allows this provision to kick in for the affected areas. Continue reading “LA Flood Disaster: Links on Government Aid & Where to Donate”