Several commentators have called attention to the statement of the IRS in Revenue Procedure 2018-5, just reiterated in Rev. Proc. 2019-1, that it will not issue a determination letter recognizing exemption from income tax for “an organization whose purpose is directed to the improvement of business conditions of one or more lines of business relating to an activity involving controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law regardless of its legality under the law of the state in which such activity is conducted.”
These commentators suggest that this position could constitute impermissible viewpoint discrimination in violation of the First Amendment. I do not view the IRS announcement in this way. Instead, I see it as an application of the long-standing principle denying exemption to entities with an illegal purpose or engage primarily in illegal activities.
The illegality doctrine has long prevented exemption under section 501(c)(3), the category that encompasses what we generally call charities. In the words of Section 101(c) of the ALI Draft Restatement of the Law of Charitable Nonprofit Organizations, “[a] purpose is not charitable if it is not lawful, its performance requires the commission of criminal or tortious activity, or it is otherwise contrary to fundamental public policy.” Continue reading “The IRS Did Not Violate the First Amendment in Declining to Exempt Organizations to Help Marijuana Dealers”