Testimony of Bradley A. Smith Before the Senate Finance Committee Subcommittee on Taxation and IRS Oversight

May 4, 2022   •  By Brad Smith   •    •  

PDF of testimony available here

Statement of Bradley A. Smith
Before the Senate Finance Committee
Subcommittee on Taxation and IRS Oversight
United States Senate
May 4, 2022

Chairman Whitehouse, Ranking Member Thune, and members of the Subcommittee, on behalf of the Institute for Free Speech, thank you for inviting me to testify at this hearing on “Laws and enforcement governing the political activities of tax-exempt entities.”

The Institute for Free Speech is a nonpartisan, nonprofit 501(c)(3) organization focused on promoting and protecting the First Amendment’s political rights of speech, press, assembly, and petition. I founded the Institute in 2005, after completing my term as Commissioner at the Federal Election Commission (FEC), because it had become clear to me, both as an academic and then in my time as a Commissioner, that the public is greatly misinformed about laws regulating political speech, including the extent and content of such laws, their real-world effects, and their enforcement. The Institute has worked tirelessly to bring an honest, nonpartisan approach to these issues.

I. Introduction

For many reasons, the enforcement of campaign finance and other laws regulating political speech is a highly complex issue. Most importantly, such laws must be carefully crafted in order to avoid infringing on First Amendment rights. Unfortunately, too often these laws have not been carefully written, and when such laws are combined with criminal penalties, they provide a breathtakingly powerful tool for elected officials and government employees to use to try to silence or hinder political opposition.

Ironically, the last time I was asked to testify at a hearing dedicated to political activity by tax-exempt organizations was in 2013 before the Senate Judiciary Committee’s Subcommittee on Crime and Terrorism, then chaired by Senator Whitehouse. At that hearing, a witness called by the majority Democrats noted that he was “optimistic” about the ability of the Internal Revenue Service to regulate political speech, praising the agency as “scrupulously fair and nonpartisan” and singling out the then-Director of the Exempt Organization Division, Lois Lerner, for particular praise. Committee on the Judiciary, Subcommittee on Crime and Terrorism, 113th Cong., Apr. 9, 2013, p. 70-71 (Supplemental Statement of Gregory L. Colvin). One month later, Ms. Lerner “told a stunned audience of tax attorneys in Washington that the IRS had delayed and obstructed the tax exemption applications from conservative-sounding organizations,” and later that month, the U.S. Treasury Inspector General made public a report confirming and detailing the nature of the targeting.” Michael Wyland, “Whatever Happened to the IRS Tax Exemption Scandal?”, Nonprofit Quarterly, Aug. 22, 2017. Now here we are again, with another Democratic Senate majority facing fierce political headwinds, and it appears that a small group of senators is looking to respond by trying to further involve the IRS in regulating political speech.

The temptation to use regulation and enforcement for political advantage is bipartisan. Let’s begin by considering the very first prosecution brought under the Federal Election Campaign Act of 1971: A suit against the National Committee for Impeachment, brought by the Justice Department under then-President Richard Nixon.

On May 31, 1972, a two-page ad appeared in the New York Times that featured the headline “A Resolution to Impeach Richard Nixon as President of the United States.” The ad, which cost $17,850, was paid for by a group consisting of several lawyers, at least one law professor, a former United States senator, and several other citizens of modest prominence, calling themselves the National Committee for Impeachment. In addition to criticizing President Richard Nixon, the ad recognized an “honor roll” of several congressmen who had introduced a resolution that called for the president’s impeachment. In response, the United States Department of Justice moved swiftly, getting a federal district court to enjoin the National Committee for Impeachment and its officers from engaging in further political activity. Even though the ad did not discuss the upcoming election or urge anyone to vote in any particular manner, the government argued that the Committee was violating the Federal Election Campaign Act of 1971 because its efforts had the potential to “affect” the 1972 presidential election, and the Committee had not properly registered with the government to engage in such political activity.

Ira Glasser, who was an Executive Director of the American Civil Liberties Union, noted that the government “wrote a letter to The Times threatening them with criminal prosecution if they published such an ad again…. Soon after, the ACLU itself sought to purchase space in The Times in order to publish an open letter to President Nixon, criticizing him for his position on school desegregation. The letter made no mention of the election and indeed until many decades later the ACLU never supported or opposed any candidate for elective office. Fearful of government reprisal based on the government’s threatening letter from the previous case, the Times refused to publish the ad.”

In both cases, these groups’ First Amendment rights were eventually vindicated. However, during the time it took to win these cases, much speech about elected officials and public affairs was thwarted. Further, fighting the prosecutions came at great expense and much anxiety for those who simply sought to speak out about their government.

The history of criminal and tax enforcement of campaign finance law had largely been one of political prosecutions that should serve as a warning to this body. The first case in which the U.S. Supreme Court clearly accepted the idea that regulation of political speech could be constitutional – which it did over the vigorous dissents of Justices William O. Douglas and Earl Warren – was United States v. Auto Workers, 352 U.S. 567 (1957). That case, as legal historian Allison Hayward has shown, was brought by the Eisenhower administration to seek to quash union political power after the merger of the AFL and the CIO. Fortunately, though the Supreme Court refused to quash the prosecution before trial as unconstitutional, the government was unable to get a conviction. See Allison R. Hayward, Revisiting the Fable of Reform, 45 Harv. J. Legis. 421 (2008).

The Eisenhower Administration was merely following its predecessor, the Truman Administration, which had engaged in a series of political prosecutions aimed at auto dealers in Michigan in the late 1940s. In those cases, the U.S. Attorney prosecuted only reluctantly, viewing the violations as minor (in the case of some defendants) to non-existent (in the case of others), and as raising serious constitutional issues. But politicians in Washington insisted – apparently, like today, for political reasons – on “aggressive enforcement.” Like today, the major news columnists of the day, most notably Drew Pearson, were enlisted to whip up public fervor, with Pearson presumably benefiting from a stream of leaks from the Attorney General’s office in Washington. Nevertheless, perhaps foreshadowing such prosecutions as that of John Edwards, “once in court, prosecutors could not win a conviction, and jurors expressed distaste for enforcing this criminal statute against this kind of activity.” Indeed, the entire series of prosecutions was based on the belief of large-scale violations “that, as it turned out, did not exist.” But the prosecutions were directed from Washington because “chilling auto dealers and other corporate managers from making contributions to Republicans served the Administration’s political agenda.” See Allison R. Hayward, The Michigan Auto Dealers Prosecution: Exploring The Department of Justice’s Mid-Century Posture Toward Campaign Finance Violations, 9 Election L. J. 177 (2010).

The IRS has frequently been the tool of choice to harass political opposition. President Franklin Roosevelt used it to harass newspaper publishers, including William Randolph Hearst and Moses Annenberg (publisher of the Philadelphia Inquirer). He also used the IRS investigations to harass political rivals including Huey Long and Father Coughlin, and prominent Republicans including former Treasury Secretary Andrew Mellon.

In the 1960s, President Kennedy’s IRS Commissioner Mortimer Caplin, who later founded the law firm of Caplin and Drysdale, established the “Ideological Organizations Audit Project” for the express purpose of auditing and harassing conservative opponents of the President. In a letter to Treasury Secretary Henry Fowler, Caplin noted, “We recognized the sensitivity of just going after [the] right wing, so we wanted to add both left- and right-wing groups for balance.” Illustrating the bipartisan nature of partisan abuse of the IRS, Caplin noted that adding left-wing groups was dicey because many, “had already been given a difficult time during the Eisenhower years.” The agency also requested investigations of corporate backers of various nonprofits involved in civic discussion.

Under the Nixon administration, the IRS was given a list of Nixon’s “enemies” and thousands of groups were targeted. It was because of this long chain of abuses that Congress finally made it illegal to use the IRS for political intelligence gathering and gain in the 1970s. See John A. Andrew, The Power to Destroy: Political Uses of the IRS From Kennedy to Nixon (Ivan R. Dee 2002); John A. Andrew, The Other Side of the Sixties (Rutgers Univ. Press 1997); David Burnham, A Law Unto Itself: The IRS and the Abuse of Power (Random House 1990).

Given this history, and additional structural problems discussed below, the Institute for Free Speech believes that the IRS should not be engaged in the minutiae of regulating political or politically related speech at all.

If an entity with a social welfare purpose is deemed a political committee (“PAC”) under federal or state law, it ought to be regulated by the IRS as a 26 U.S.C. (“IRC”) §527 organization. If it is not a political committee, its election campaign speech would not be its primary purpose and thus such a social welfare group would fall under 26 U.S.C. §501(c)(4). This straightforward approach would harmonize the IRS’s rules with those of the Federal Election Commission, the body entrusted by Congress with “exclusive jurisdiction” for civil enforcement of the nation’s campaign finance laws. 52 U.S.C. §30106(b)(l).

This approach would also recognize that in a democracy, political education and the discussion of public affairs not only should but must fall within the definition of “social welfare” and “educational” activities that constitute exempt activities under §501(c)(4). Nothing in the statute requires exclusion of these functions from the definition of social welfare. Finally, and most importantly, this straightforward approach offers real clarity without dragging the IRS further into the thicket of political speech regulation, a tangle from which it – and the Service’s reputation for the neutral, nonpartisan collection of revenue – might never recover.

In a 2013 special report to Congress following the IRS targeting scandal, then-National Taxpayer Advocate Nina Olson feared that the scandal came about because “[t]he IRS, a tax agency, is assigned to make an inherently controversial determination about political activity that another agency may be more qualified to make.” See Nina Olson, Special Report to Congress: Political Activity and the Rights of Applicants for Tax-Exempt Status (2013). As she wrote in her report:

It may be advisable to separate political determinations from the function of revenue collection. Under several existing provisions that require non-tax expertise, the IRS relies on substantive determinations from an agency with programmatic knowledge.

Potentially, legislation could authorize the IRS to rely on a determination of political activity from the Federal Election Commission (FEC) or other programmatic agency. Specifically, the FEC would have to determine that proposed activity would not or does not constitute excessive political campaign activity.

In fact, no legislation is needed. The IRS could today rely on FEC determinations. The FEC is more qualified to make such determinations not only because of its expertise but also because of its structure, which poses less of a risk of partisan enforcement.

II. The Nature of the FEC versus the IRS

Understanding the FEC and its design is important to understanding the problems of using another agency designed for one thing – say, the smooth functioning of securities markets, regulation of broadcasting, or tax collection – for another purpose, such as regulation of campaign spending and speech about politics and public affairs.

Perhaps the most important feature of the FEC’s design is its bipartisan makeup. Most federal independent agencies are directed by a board or commission with some guaranteed level of bipartisan makeup. Only the FEC and the U.S. International Trade Commission have equal size blocks of commissioners, with 3 from each major party, and only the FEC requires four votes of out six commissioners for most actions.

The reason for the FEC’s unique design should be obvious. If some measure of guaranteed bipartisanship is viewed as a valuable thing in most independent agencies, this bipartisanship would seem essential for an agency whose core mission is to regulate political speech in ways that can determine who wins and who loses elections. This is a question both of preventing actual abuse of the agency for partisan gain and preventing the appearance that the agency’s decisions are motivated for partisan gain. In short, there is a strong argument for why the FEC is structured as it is, which is to prevent one party from changing the regulatory regime or using the enforcement process for partisan gain.

The FEC also has an enforcement process that aims to resolve matters through conciliation rather than fines or litigation. This, too, has drawn much criticism from those seeking “stronger” enforcement. But this process also exists for a reason. The overwhelming number of complaints submitted to and violations found by the FEC are not due to corruption but inadvertent violations of the law. Many are nothing more than administrative violations against the state.

The cost to a political candidate of having been found to have “violated the law,” however, can be great; the rewards to a zealous prosecutor or even FEC Commissioner or General Counsel who is seen to be crusading for “clean elections” are perhaps even greater in the other direction. Therefore structuring the system around voluntary conciliation agreements is an intentional means to depoliticize the complaint process. Again, placing primary enforcement responsibility with the Justice Department, the IRS, or another agency whose process is geared to leveling direct sanctions dramatically alters the balance in the direction of partisan enforcement, and does so in a way that may reward overly aggressive prosecution by government officials in this sensitive First Amendment area.

Thus, while it is true that almost all government agencies have structural features to insulate them from politics, the FEC has more political safeguards than most agencies, and it has them for very compelling reasons.

The IRS faces far fewer situations regarding election speech in its everyday business than does the FEC. Its culture and expertise are therefore quite different from that of the FEC, which regularly faces these issues. Indeed, one reason for the frustration some express with the FEC has been the critics’ unwillingness to accept the constitutional restraints under which the FEC operates. Those who seek to push regulation onto other agencies often do so precisely because they seek to bypass such constitutional sensitivities that are, and ought to be, a hallmark of the FEC – the agency charged by Congress with “exclusive civil enforcement” of campaign finance laws.

III. Problems of Enforcement

Vague election laws combined with criminal penalties are a recipe for abusive political prosecutions. It is a threat both to the First Amendment and to honest government. In the case of the Michigan auto dealers, which I discuss above, prosecutors were unable to gain convictions in cases that went to trial; but the threat of prison time convinced many defendants to plead no contest and pay fines.

Similarly, as the unsuccessful prosecution of John Edwards proved, much of campaign finance law is vague, complicated, or both. Because of the potential infringement on civil liberties, Congress should avoid adding criminal penalties to existing or new campaign finance laws. Arguably, there are already too many provisions that provide for criminal penalties. The Bipartisan Campaign Reform Act of 2002 extended the statute of limitations for many criminal violations of campaign finance laws, made more provisions of the law subject to criminal sanctions, and required the United States Sentencing Commission to issue guidelines for campaign finance law violations. Other recent high-profile political prosecutions for vague allegations of campaign finance laws have similarly come apart at the seams, as in the prosecution of Ted Stevens. Unfortunately, far too often the damage is done by the time the law catches up to the hysteria. Stevens was convicted just days before the election, which he lost by less than 1% of the vote, and only vindicated posthumously after a plane crash.

The message we should send to the American people is that political participation is a good thing, not a bad thing. For half a century, the message of those who advocate for stricter campaign finance laws has been that political participation is bad, that people who donate are only out for themselves, and that political speech is, quite literally, dangerous. It is no wonder that the confidence in democratic institutions has declined.

IV. The Need for Campaign Finance Law Simplification

The federal election laws and regulations now contain over 376,000 words. But this just scratches the surface of election law. There are over 1,900 advisory opinions and 7,900 enforcement actions that provide guidance on what these vague laws might mean. As the Supreme Court noted in Citizens United, “Campaign finance regulations now impose ‘unique and complex rules’ on ‘71 distinct entities.’ These entities are subject to separate rules for 33 different types of political speech. The FEC has adopted 568 pages of regulations, 1,278 pages of explanations and justifications for those regulations.” (Citing Brief for Seven Former Chairmen of FEC).

Congress’s vague laws often can’t even be interpreted by the FEC. For example, in August 2012, the FEC considered an Advisory Opinion Request for the National Defense Committee, filed by our organization asking whether seven proposed ads would trigger FEC regulation. The FEC said three of the ads would not trigger FEC regulation, but it could not render an opinion on the other four ads, and could not decide on whether the group had to register with the FEC. Last year, the FEC considered 13 Advisory Opinion Requests but failed to provide an opinion in three of those requests. In one Advisory Opinion rendered by the agency, it agreed the proposed activity was allowed by the law but could “not agree on a rationale for this conclusion.” And yet most practitioners will tell you – correctly, in my view – that the FEC regulations are clearer than the regulations that the IRS already applies when examining political activity by nonprofit organizations. The problem is not the FEC; it is the law.

The most pressing need for Congress is to make campaign finance law a lot simpler. How can we expect the FEC or Justice Department to fairly enforce laws no one can understand? It is literally impossible to navigate campaign finance laws without a lawyer, and even then, your lawyer might not be able to give you a straight yes or no answer. Worse, many lawyers without campaign finance expertise will give incorrect answers.

As a result, well-meaning citizens often stumble into breaking these laws, in part because the thresholds on regulated speech are absurdly low. For example, current law requires reporting of all independent expenditures over just $250.

Brad Smith

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