Why the IRS should want to develop rules regarding charities and politics.

• Author: Aprill, Ellen P.

INTRODUCTION I. KAPLOW ON RULES AND STANDARDS II. THE LEGAL COMMANDS AT ISSUE III. ENFORCEMENT OF THE CAMPAIGN INTERVENTION PROHIBITION IV. THE AFFECTED COMMUNITY V. APPLICABLE NORMS VI. ARGUMENTS AGAINST RULES VII. WHAT SHOULD THE IRS DO? CONCLUSION INTRODUCTION

At All Saints Episcopal Church in California, two days before the 2004 presidential election, its former pastor imagined a debate between Jesus and the presidential candidates. The pastor began by assuring his listeners, "I don't intend to tell you how to vote." (1) He went on, in the voice of Jesus, to criticize the Iraq war into which "President Bush ha[d] led us," and wondered whether President Bush really meant "to end a decade-old ban on developing nuclear battlefield weapons," (2) as well as to ask why so little was mentioned about the poor. (3) Finally, he asserted in his own voice, that the number of abortions had risen under George W. Bush because women having abortions could not afford to have a child. (4) The pastor concluded, "When you go into the voting booth on Tuesday, take with you all that you know about Jesus, the peacemaker. Take all that Jesus means to you. Then vote your deepest values." (5)

A few months earlier, on July 11, 2004, Julian Bond spoke at the 2004 NAACP Convention. His lengthy speech reviewed the civil rights records of presidents of both parties, but especially criticized the Republican Party, its tax policy, civil rights policy, the war in Iraq, and other foreign and domestic policy issues. (6) Bond continued:

The election this fall is a contest between two widely disparate views of who we are and what we believe. One view wants to march us backward through history--surrendering control of government to special interests, weakening democracy, giving religion veto power over science, curtailing civil liberties, despoiling the environment.... The other view promises expanded democracy and giving the people, not plutocrats, control over their government. (7) The speech included statistics about African American voter registration drives and voting records. (8) It also urged the audience to vote in the upcoming election. (9)

As a result of these communications, the Internal Revenue Service ("IRS" or "Service") investigated both of these organizations, (10) which are tax-exempt under section 501(c)(3), because such entities cannot, without risking the loss of their exemption, "participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." (11) That is, they are subject to a campaign intervention prohibition. Such organizations, commonly referred to as charities, cannot endorse or oppose a candidate for public office or contribute to a candidate's campaign. The IRS has long interpreted this campaign intervention prohibition broadly. An applicable regulation, for example, refers to violating the prohibition "directly or indirectly." (12)

Revenue Ruling 2007-41, the most recent and comprehensive official IRS pronouncement on the subject, explains that "[w]hether an organization is participating or intervening, directly or indirectly, in any political campaign on behalf of or in opposition to any candidate for public office depends upon all of the facts and circumstances of each case." (13) Applying the facts-and-circumstances test, the IRS determined that All Saints Episcopal Church had violated the campaign intervention prohibition, but that the NAACP had not. (14)

How the IRS interprets, communicates, and enforces the campaign intervention prohibition, particularly indirect intervention, has been, and continues to be, a matter of controversy. Representatives from the charitable community, both before and after the publication of Revenue Ruling 2007-41, have sought greater clarity regarding the criteria for campaign intervention. Several commentators have suggested that current rules may be unconstitutionally vague and that, to avoid this problem, violation of the campaign intervention prohibition be limited to activities involving express advocacy. (15) The Supreme Court's decision in Citizens United v. Federal Election Commission, (16) which excoriated the Federal Election Commission as a "censor" that, by embracing "the open-ended rough-and-tumble of factors," had chilled political speech of "primary importance" to the "integrity of the electoral process," has given renewed urgency to this plea. (17)

These different attitudes of the charitable community and the IRS reflect the difference between rules and standards. Louis Kaplow explains in an influential article, Rules Versus Standards: An Economic Analysis, that the choice between rules and standards involves "the extent to which a given aspect of a legal command should be resolved in advance or left to an enforcement authority to consider." (18) By asking the IRS for clarity and bright-line rules to define the prohibition, the charitable community emphasizes a key ex ante consideration--the impact of guidance on appropriate charitable behavior. By offering a multifactor approach dependent on the particular situation, the IRS stresses an equally important ex post consideration--the impact of guidance on enforcement.

Both considerations, of course, have a place in any calculus. Kaplow's article, however, sets out a framework to help those that must give content to legal commands and guidance to decide whether to frame such content as rules or standards. This Article argues that, under Kaplow's analysis, the IRS's own concern for encouraging compliance should lead it to develop more rules in this area. That is, this Article emphasizes why the IRS itself should want to promulgate rules.

Part I sets forth Kaplow's analytical framework regarding levels of enforcement and how the affected community will choose to learn about the legal command, whether it is a rule or standard. Part II describes the legal commands at issue. Part III considers aspects of Kaplow's analysis related to enforcement. It examines the available sanctions, the numbers of parties subject to enforcement actions, and the kinds of sanctions in fact imposed. Part IV discusses the nature of the affected community and how members of that community will seek legal advice. Part V addresses a question Kaplow mentions frequently, but only in passing: what are the underlying norms a statutory command reflects? This Part discusses both the legislative purpose in enacting the prohibition and attitudes toward its constitutionality. Part VI considers arguments against rules, both generally and as applied to tax law. Part VII applies the Kaplow analysis to all these considerations and concludes that the IRS should invest the time to develop a set of rules.

1. KAPLOW ON RULES AND STANDARDS

   According to Kaplow, in implementing a legal command, a legal authority must begin by choosing, at least to some extent, between a rule and a standard. (19) That is, legal authorities must decide whether to issue a specific command ex ante or to wait and give the command detailed content only ex post in an enforcement action. That decision, however, is only the first of three stages that take place chronologically. In stage two, individuals must decide to act. In stage three, some kind of enforcement action determines the application of the governing law. (20)

   Kaplow's article focused on situations in which legislatures promulgate legal commands and courts enforce them. (21) His analysis, however, applies in particularly interesting ways to an administrative agency such as the IRS, (22) which has a duty to ensure that the tax laws are obeyed, but must also consider how best to deploy its limited resources. The IRS is, of course, constrained both by the provisions that Congress enacts in the Internal Revenue Code and decisions that courts issue. But it also has the capacity to interpret congressional commands through various forms of administrative guidance (some of which are promulgated jointly with the Treasury Department) and to enforce them in audits and other enforcement actions.

   In Kaplow's analysis, legal authorities weighing the costs of promulgation and the costs of enforcement should not make a decision at stage one without carefully considering stages two and three. Cost of promulgation is important. "Rules are more costly to promulgate than standards because rules involve advance determinations of the law's content...." (23) Nonetheless, "[i]f there will be many enforcement actions, the added cost from having resolved the issue on a wholesale basis at the promulgation stage will be outweighed by the benefit of having avoided additional costs repeatedly incurred in giving content to a standard on a retail basis." (24) Moreover, a rule may be preferable when the legal command governs "millions of individuals and billions of transactions," (25) such as in the federal income tax, even if enforcement actions are rare. In contrast, if the relevant facts vary widely, "[d]esigning a rule that accounts for every relevant contingency would be wasteful, as most would never arise." (26) Standards are better suited for situations in which a particular set of facts will occur only rarely.

   Legal authorities also need to bear in mind, however, the impact of their choice on the behavior of those whom their command affects; in other words, they must consider stage two. "Being imperfectly informed of the law's commands," affected parties may "act based on their best guess of the law," or they may seek to acquire legal information. (27) They may acquire such legal knowledge by seeking professional legal advice, through study of government resources, through information disseminated by trade groups, other third-party resources, or by other means. On the basis of this legal information, they may decide to avoid conduct that they learn is illegal or subject to sanctions to which they do not wish to become...