Tagged: IRS
Is the Johnson Amendment Constitutional?
My previous Dome blog entry discussed the Johnson Amendment and the fight that has surrounded the amendment since its creation in the 1950s. The Johnson Amendment was added to Section 501(c)(3) of the U.S. tax code by then-Senator Lyndon B. Johnson to limit the political activity of 501(c)(3) organizations. The Amendment prohibits 501(c)(3) organizations from endorsing or opposing political candidates. Many organizations have been trying to repeal the Johnson Amendment for years, and many argue (including members of Congress) that it violates the First Amendment of the U.S. Constitution.
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Two vocal opponents of the Johnson Amendment (and the sponsors of the Free Speech Fairness Act in both houses of Congress) Senator James Lankford and Congressman Steve Scalise argue that the Amendment must be repealed to protect the First Amendment rights of 501(c)(3) non-profit employees. They argue the Bill of Rights protects the right of all Americans to freely express their ideas and opinions without persecution from the government, and the Johnson Amendment violates this right by stripping 501(c)(3) employees from being able to speak their minds about political issues. As discussed in my previous post, the Johnson Amendment prohibits 501(c)(3) employees from endorsing or opposing candidates, and violations of the Amendment risks punishment by the IRS either by fine, revocation of the organization’s tax-exempt status, or both. This, therefore, begs the question of whether the Johnson Amendment does in fact violate the First Amendment. This Dome blog post will look at legal precedent to see if the Amendment has been challenged for its constitutionality in the past, and if so, the arguments the court made in their decision.
Before going into court cases about whether or not the Johnson Amendment actually violates the First Amendment, it is important to look at the text itself. The text of the First Amendment reads:
“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.”
Members of Congress and other organizations who oppose the Johnson Amendment mainly argue that it violates the freedom of speech, which is in fact why the current bill before Congress attempting to repeal the Amendment is titled the “Free Speech Fairness Act.” Within the text of the First Amendment, they argue that the Johnson Amendment is “abridging the freedom of speech” of 501(c)(3) tax-exempt nonprofit employees, but in particular religious ones, such as pastors, priests, and rabbis.
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But has the constitutionality of the Johnson Amendment actually been determined by the Supreme Court as it applies to religious organizations? The answer, unfortunately, is no. However, two U.S. Court of Appeals circuits have upheld the Amendment as constitutional in the past when applied to religious organizations. The first case, Christian Echoes Nat’l Ministry v. United States (1972), involved a nonprofit religious corporation contesting the revocation of its 501(c)(3) tax-exempt status by the IRS as punishment for violating the Johnson Amendment. Through various appeals and remands, the ultimate holding by the Tenth Circuit Court of Appeals was that the organization no longer qualified as a tax exempt organization under section 501(c)(3) of the tax code. As one argument against the revocation of their status, Christian Echoes argued the Johnson Amendment was unconstitutional and violated their right to free speech. However, the court held that “in light of the fact that tax exemption is a privilege, a matter of grace rather than right… the limitations contained in Section 501(c) (3) withholding exemption from nonprofit corporations do not deprive Christian Echoes of its constitutionally guaranteed right of free speech.” Christian Echoes Nat’l Ministry v. United States, 470 F.2d 849, 857 (10th Cir. 1972). The court therefore determined the taxpayer must refrain from these political activities to obtain “the privilege of exemption,” which Christian Echoes benefited from until their status was revoked.
The argument made by the court in Christian Echoes is very similar to the argument made by proponents of the Johnson Amendment, such as the Freedom From Religion Foundation, who argue because religious organizations benefit essentially from a government subsidy, in exchange for that subsidy they relinquish some of their rights. These rights can at any time be reclaimed, but at the cost of losing the subsidy, ultimately leaving the choice between the two up to individual organizations.
The District of Columbia Circuit Court of Appeals has also taken up this issue more recently in Branch Ministries v. Rossotti (2000), regarding the constitutionality of the Johnson Amendment, but for violation of a different part of the First Amendment. In this case, a church had its tax-exempt status revoked for intervening in political campaigns, violating the Johnson Amendment. The church argued that revoking their tax-exempt status was a violation of the Free Exercise clause of the First Amendment, as in violating their right to freely exercise religion. To show the Free Exercise clause had been violated, the church had to establish their “free exercise right has been substantially burdened.” Branch Ministries v. Rossotti, 211 F.3d 137, 142 (2000). The court, however, held the Johnson Amendment did not violate the First Amendment because the church failed to establish that their free exercise right had been substantially burdened. Despite the claim by the church that by revoking their tax exempt status would threaten its very existence, the court determined this was overstated because the impact of revocation “is likely to be more symbolic than substantial,” because if they stop intervening in political campaigns they can regain their tax-exempt status, and even if they do not, “the revocation of the exemption does not convert bona fide donations into income taxable to the Church.” Therefore, the burden is not substantial enough to be considered a violation of the First Amendment. See, Branch Ministries, 211 F.3d at 142-143.
It seems currently that courts are finding the Johnson Amendment does not, in fact, violate the First Amendment. The Supreme Court has said in the past they believe tax benefits nonprofits are given are “a form of subsidy that is administered through the tax system,” which seems in line with the view of supporters of the Johnson Amendment and these two Court of Appeals cases. See, Regan v. Taxation with Representation, 461 U.S. 540, 544 (1983). They have not, however, delivered a decision on the constitutionality of the Johnson Amendment as it applies to religious organizations. Therefore, despite the Court of Appeals cases, the fight over this issue is unlikely to end until the Supreme Court formally rules on the Johnson Amendment as it applies to religious organizations once and for all.
Kate Lipman anticipates graduating from Boston University School of Law in May 2021.
Time to Hang up the Boxing Gloves? The Fight Over the Johnson Amendment
Most Americans have never heard of the Johnson Amendment, never mind the nearly 70 year legal and political battle over its meaning and reach. What is the Johnson Amendment, and why is it so important to so many organizations that they have been either trying to protect or destroy it for decades? This post will attempt to explain the long-fought political battle over the Johnson Amendment.
The Johnson Amendment prohibits not for profit, or 501(c)(3), organizations from participating in politics, including restricting them from endorsing political candidates. In 1954, then-Senator Lyndon B. Johnson sponsored the amendment to the tax code after two tax-exempt organizations opposed his candidacy in the recent Texas primary. Until then, tax-exempt organizations had been extremely engaged in political activity through the country. The Johnson Amendment was relatively successful in getting tax-exempt organizations from being politically engaged, at least directly. Many organizations, however, simply have separate political branches called 501(c)(4) political action branches. 
Recently, Amendment opponents, such as Congressman Steve Scalise (R-La.) and 40 other Republican Representatives, have introduced the Free Speech Fairness Act. This bill seeks to amend the Internal Revenue Code of 1986 “to allow charitable organizations to make statements relating to political campaigns if such statements are made in the ordinary course of carrying out its tax-exempt purpose.”—effectively repealing the Johnson Amendment. If passed, it will permit 501(c)(3) tax-exempt organizations under Section 501(c)(3) to endorse or oppose political candidates without fear of losing their tax-exempt status.
Supporters of the Johnson Amendment are varied, including both secular and religious organizations. The most outspoken supporter of the amendment is the Freedom From Religion Foundation (FFRF). The FFRF and other similar organizations fear repealing the Johnson Amendment would blur the traditional line between church and state. Other religious organizations, such as the Jewish Federations of North America, oppose the FSFA because they fear getting involved with politics would tarnish the integrity of their faith. Many of these organizations, particularly the FFRF, are especially concerned about the threat of “dark money” they fear repealing the Johnson Amendment would create. “Dark money” refers to political spending by nonprofit organizations that are not required to disclose their list of donors to the IRS or the public. This hidden list of donors can be problematic as many believe this allows nonprofit organizations to receive donations in exchange for political endorsements, influence in elections, and lobbying activities. Specifically, all 501(c)(3) nonprofits, except for churches and other religious organizations, must submit Form 990 to the IRS and demonstrate how they are spending their money and how much money they are receiving (though it does not require disclosure of who the donors are). Because churches do not need to submit this form, the Freedom From Religion Foundation and other opponents of the FSFA fear the bill could lead to churches becoming unregulated Political Action Committees.
Many conservative and religious organizations, on the other hand, support the FSFA. Its biggest proponents are religious organizations such as the National Religious Broadcasters (NRB), as well as conservative organizations like the Family Research Council (FRC). The Johnson Amendment has also garnered attention from President Trump, who has promised on many occasions to eliminate it due to its restrictions on free speech for priests, pastors, and other religious organizations. These groups, the sponsors of the FSFA, and the President argue the Johnson Amendment is unconstitutional because it stifles free speech, including the ability of religious figures and organizations to openly endorse or oppose individual political candidates from the pulpit. Some groups, like the Family Research Council, even argue the Amendment restricts the content of sermons as well, a claim made in an article titled “Figures of (Free) Speech,” published on February 4, 2019, which has since been taken off of the Family Research Council website.
However, is this argument an accurate representation of the law? Does the Johnson Amendment actually stop religious leaders from preaching on topics like “life or marriage” or of “conscience and convictions,” as the Family Research Council claims? The answer seems to be no. The Johnson Amendment does not restrict churches from discussing social or moral issues with their congregations, or even from lobbying Congress. The only restriction the Johnson Amendment imposes is specifically related to candidate endorsements and/or candidate opposition. Moreover, individual priests and pastors are actually free to endorse candidates when they do so as individuals, on their own, when they are clearly speaking as private citizens and not for their religious organization.
Beyond the organizations who are vehemently opposed to the FSFA, a LifeWay poll published in 2016 found that 79% of Americans do not believe it is appropriate for pastors to endorse political candidates during a public church service.
This, therefore, begs the question, is the repeal of the Johnson Amendment really worth fighting for year after year? Not only do the constant attacks against the amendment cost pro-Johnson Amendment organizations like the FFRF money in time and labor expended through research and lawsuits, but it similarly costs opponents of the amendment valuable donation dollars that could be put towards something more meaningful or substantial.
In 2012, Pew Research published an independent guide to the IRS rules on political activity by religious organizations. The Pew Research guide “Preaching Politics From the Pulpit: 2012 Guide to IRS Rules on Political Activity by Religious Organizations” delineates specifically what religious organizations legally can and cannot do within the context of the Johnson Amendment. According to the guide, the political campaign intervention prohibition does not restrict the discussion of any issues desired, as long as they are not linked to supporting or opposing any specific candidates, PACs, or political parties. It therefore seems that the potential gains for the freedom of speech from this bill passing would be very little compared to the thousands of dollars wasted each year on both sides of the fight on this issue.
Finally, not only is the purpose of the bill not supported by the American public, but the concerns raised by opponents of the bill are especially troubling and should certainly make everyone question whether repealing the Johnson Amendment will ultimately do more harm than good. The separation of church and state is a foundational principle of our nation, and beyond the need to protect that balance, the concern organizations like FFRF have about the potential for dark money in religious institutions seems a valid concern, particularly because they do not submit Form 990.
Ultimately, lawmakers in Washington will need to decide whether it is worth continuing to introduce this bill every year and cost both sides of the argument time and money either trying to fight or support the repeal of the Johnson Amendment.
Kate Lipman anticipates graduating from Boston University School of Law in May 2021.
A New Exclusion from the Capital Gains Rate: Self-Created Intangibles
On December 20, 2017 Congress passed H.R. 1, the Tax Cuts and Jobs Act. This act introduces the most sweeping tax changes in decades lowering individual and corporate tax rates, with one stated goal of allowing buyers to write off the costs of new investments. In relevant part, this Act introduces one provision that removes a favorable tax rate for innovators with self-created intellectual property and eliminates the ability to treat certain self-created intellectual property as capital assets.
Under the prior tax scheme, self-created intellectual property would have been subject to the capital gains tax rate following sale of those assets. However, Section 1221 of the Internal Revenue Code under the new law exempts self-created intellectual property from capital gains treatment.
“This new tax law amends IRC Section 1221(a)(3), resulting in the exclusion of a patent, invention, model or design (whether or not patented), and a secret formula or process that is held either by the taxpayer who created the property or a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created) from the definition of ‘capital asset.’ As a result of this exclusion, gains or losses from the sale or exchange of a patent, invention, model or design (whether or not patented), or a secret formula or process that is held either by the taxpayer who created the property or a taxpayer with a substituted or transferred basis from the taxpayer who created the property (or for whom the property was created) will not receive capital gains treatment.”
Effectively, the sale of self-made intellectual property typically will now be subject to the higher top individual tax rate of 37 percent, as opposed to the capital gains tax rate of 20 percent. In practice, this will dramatically alter if and how a seller chooses to dispose of these assets.
Before, sellers would be encouraged to sell self-made intellectual property; however, under the new scheme, sellers are less encouraged to sell these assets because they will be subjected to a significantly higher tax rate. Under the previous tax scheme, a partnership’s sale of assets could be eligible for the long-term capital gains rate. Under the new Act, entrepreneurs and individual inventors possessing newly designed, self-made technologies will not be eligible for the lower capital gains rate when they create a company from that technology or sell the technology to another who will create a company. To net the same amount of after-tax dollars following a sale, owners of self-created intellectual property must seek a higher purchase price to offset the higher tax treatment. In effect, the new tax scheme alters the pricing and value of a patent.
Congress’s intent regarding the capital gains tax is that profits and losses arising from everyday business
operations be characterized as ordinary income and loss, not capital gains. Therefore, the “self-made intangibles” exclusion is likely to be broadly construed to include most forms of intellectual property and this exclusion furthers that broad purpose. However, the practical effect of this exclusion from the capital gains tax is curious considering Congress’s goals of the Tax Cuts and Jobs Act. The exclusion eliminates an incentive to sell assets, which conflicts with the legislation’s goal of allowing buyers to write off the cost of new investments. Rather than further incentivizing investment, this provision erects a significant barrier to investment. Buyers will be eager as ever to purchase assets because of immediate expensing, but sellers will be hesitant to sell.
There are a few limitations to this discussion. Section 1221’s exception of intellectual property from the capital gains tax rate will likely only have a practical effect on the behavior of individuals, rather than corporations. The difference between the capital gains rate and ordinary income is much greater for individuals than it is for corporations; the corporate tax rate under H.R. 1 is 21 percent, only a one percent increase from the capital gains rate, as opposed to a 17 percent increase between the capital gains rate and the top individual income rate. Therefore, corporations are unlikely to treat the sale of these “self-created tangibles” significantly differently than under the previous tax scheme, at most seeking a modest increase in sale price to accommodate the one percent tax increase. In addition, Section 1221(b)(3) directs that musical compositions and copyrights in musical works may still be treated as capital assets. Therefore, not all intellectual property will be affected by this categorical exclusion from capital gains.
Eric Dunbar graduated from Boston University School of Law in May 2018.
