Social Welfare Status Denied to Cannabis Retailer

• DOI: http://doi.org/10.1002/npc.30665
• Published date: 01 December 2019
• Date: 01 December 2019

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 December 2019 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

drafting regulations, or whether the same group engages

in ‘providing political information‘ or any candidate for

office or any ballot issue or legislation up for vote in the

Legislature, or on any regulation being considered by the

Assembly or a state agency, whether that political infor-

mation is a fact or an opinion held by the organization.”

The court then considered the phrase “providing

political information.” This phraseology was held to

improperly “[corral] into the [law’s] disclosure regime any

political information from independent groups spending

more than $3,000 a year that contains either a fact or

an opinion pertaining to any candidate for public office

or ‘any public question.’” The court was likewise critical

of the sweep of the phrase “influencing or attempting

to influence.” The scorecard was held to trigger the law’s

disclosure obligations by being characterized as “influ-

encing or attempting to influence” the “chances of each

and every candidate mentioned.”

The court concluded that there is “no practical dif-

ference” in whether the law is interpreted narrowly (the

defendants’ view), read broadly (the plaintiff’s view), or

solely by the plain language of the “final product.” The

conclusion, it wrote, is the same: The “provision of any

fact or opinion on any candidate or public question,

legislation or regulation by an independent group that

raises or expends more than $3,000 for that purpose

annually must disclose the identities of donors who

have contributed more than $10,000 annually and must

disclose their expenditures.” Again, this is the case irre-

spective of whether the independent group intended to

provide political information, intended to “influence or

attempt to influence,” or intended to engage in “elec-

tioneering communications” that promote or oppose a

candidate for office or a “public question.”

As the motion for the preliminary injunction, and the

question as to whether the plaintiff is likely to prevail on

the merits, the court pointed to the US Supreme Court’s

declaration in its opinion in Buckley that the compelled

identification of contributors to independent groups that

expend money on political causes “can seriously infringe”

the rights to “privacy of association and to belief guar-

anteed by the First Amendment.” Thus, the standard of

“exacting scrutiny” is to be applied, meaning that the

law “can be sustained only if it furthers a vital govern-

mental interest . . . That is achieved by a means which

does not unfairly or unnecessarily burden either a minor-

ity party’s or independent candidate’s equally important

interest in the continued availability of political opportu-

nity.” The court concluded that the “plain text” of the

New Jersey law does not reveal the requisite “substantial

relation between the disclosure requirement and a suf-

ficiently important governmental interest.”

Again, the sweep of the state’s law was noted by the

court. It was said by the court to “[ignore] the teachings

of Citizens United.” And, again, “[m]ost constitution-

ally troubling” to the court “is the way . . . the [law]

brings communications of purely factual political infor-

mation into a disclosure and financial-reporting regime

historically limited to electioneering communications.”

One of the fundamental problems of this law is that it,

for purposes of the disclosure requirements, makes the

phrase “providing political information” as “effectively

synonymous” with the law’s definition of “electioneer-

ing communications.”

The court concluded that AFP met its burden of

“demonstrating it has a reasonable probability of win-

ning on the merits at trial on its claim that the [law] is

facially unconstitutional.” The court observed that the

grant of the injunction would prevent the state legisla-

ture from approving legislation required to “correct the

unconstitutional weaknesses” in the law. Nor, the court

also noted, would an injunction preclude the state’s

election commission from engaging in rulemaking that

might “bring clarity” to the law’s language.

Having reached that conclusion, the court held that it

is “axiomatic” that AFP has met the other three factors

for granting a preliminary injunction. [28.11(i)] ◆

SOCIAL WELFARE STATUS

DENIED TO CANNABIS

RETAILER

An organization was formed to operate a “holistic

medicine establishment” selling medicinal marijuana

products to patients with prescriptions from licensed

physicians. It conducts a storefront business, being

licensed by a state as a retailer of recreational-use can-

nabis. The IRS denied recognition of exemption as a

social welfare organization to this entity, on the grounds

that its primary activity is carrying on a business with

the public in a manner similar to for-profit organizations

(Reg. § 1.501(c)(4)-1(a)(2)(ii)).

The IRS applied the commerciality doctrine in reach-

ing this conclusion, finding that the organization “use[s]

promotional policies to enhance sales,” “advertises

goods and services,” sets margins at a level that “enables

[it] to replace merchandise inventory,” and “maintain[s]

a retail outlet with hours of operation that are com-

petitive with other retail establishments” (Priv. Ltr. Rul.

201941028). The IRS did not deploy the arguments that

it uses in the charitable setting — namely, that the activ-

ity is illegal under federal law and is contrary to federal

public policy (see below). [4.9(g), 13.3] ◆

OTHER RECENT IRS PRIVATE

LETTER RULINGS

◆A nonprofit organization, with a program of fund-

raising and dissemination of funds to patients in a state