First Amendment

New IRS Rule Seems to Violate the First Amendment by Denying Tax-Exempt Status to Drug Policy Reform Groups

It is unconstitutional for the government to discriminate against organizations based on their viewpoint.



A new IRS rule for tax-exempt organizations seems to violate the First Amendment by taking aim at groups that support a wide range of drug policy reforms. The rule, described in an Internal Revenue Bulletin dated January 2, says the IRS will deny tax-exempt status to "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."

As Washington, D.C., lawyers David Rivkin and Randal Meyer point out in The Wall Street Journal, that language arguably applies to any organization that advocates legalization of marijuana (or any other prohibited substance) or favors looser restrictions on certain prescription medications, both of which would improve "business conditions" for companies that sell those drugs. The exclusion also seems to encompass advocacy of less ambitious reforms, such as licensing new sources of marijuana for medical research, allowing state-licensed marijuana merchants to deduct their business expenses when they file their federal income tax returns, or changing the laws and regulations that discourage banks from serving such businesses.

Nonprofit organizations that are exempt from taxes under Sections 501(c)(3) and 501(c)(4) of the Internal Revenue Code (for "charitable" and "social welfare" organizations, respectively) are subject to restrictions on the amount of "lobbying" they can do. But this exclusion goes beyond those general rules by disfavoring certain viewpoints, which is unconstitutional even when the government is distributing benefits rather than directly censoring speech.

"The rule does not apply to all speech dealing with the listed substances, only that involving an 'improvement' in 'business conditions,' such as legalization or deregulation," Rivkin and Meyer note. "Efforts to maintain restrictions or impose additional ones are fine by the IRS." Hence an educational or social welfare organization that supports marijuana prohibition, unlike one that favors legalization, would be unaffected by the rule.

"The government may not discriminate against groups based on the viewpoint of their speech," UCLA law professor Eugene Volokh noted in a 2016 Volokh Conspiracy post about tax-exempt "hate groups." In the 1995 case Rosenberger v. Rector, for instance, the Supreme Court held that the University of Virginia, a state institution, violated the First Amendment right to freedom of speech when it denied religious groups funding from its Student Activities Fund. Volokh noted a 2015 D.C. Circuit case that is even more directly relevant, since it deals with an anti-Zionist group that claimed its views had led the IRS to delay consideration of its application for 501(c)(3) status. "In administering the tax code," the appeals court noted, "the IRS may not discriminate on the basis of viewpoint."

Since the IRS rule applies to organizations "whose purpose" is "improvement of business conditions" for enterprises dealing in Schedule I or Schedule II drugs, it might not encompass groups—such as the Reason Foundation, the 501(c)(3) organization that publishes this website and Reason magazine—that support drug policy reform along with other causes. But an educational or social welfare organization that is mainly devoted to liberalization of drug policy, such as the Drug Policy Alliance or the Marijuana Policy Project, would seem to fit the description.

Mason Tvert, spokesman for the Marijuana Policy Project, says his understanding is that the rule applies to new applicants for tax-exempt status but not organizations that have already been granted it. "It sounds like" a new group similar to MPP could be rejected "if whoever is reviewing the application determines the applicant would be working to advance the cannabis industry," Tvert says in an email. "It wasn't necessarily simple before. It seems like this new rule could make it even more difficult."

The IRS says groups engaged in illegal activity are ineligible for 501(c)(3) or 501(c)(4) status. But advocating changes in drug laws is not a crime; it is constitutionally protected speech, even though it may result in "improvement of business conditions" for marijuana merchants or pharmaceutical companies. There is a vaguer, potentially broader disqualification for organizations whose activities, while legal, are "contrary to public policy." But the only context in which that exclusion has been upheld is racial discrimination in education, which involves actions rather than advocacy.

I have asked the IRS to clarify the aim, scope, and legal basis of the rule. I will update this post if and when I get a response.

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  1. Simple solution: eliminate tax-exempt organization status altogether.

    1. Simpler solution, eliminate taxes.

      1. Taxes are fine to pay for constitutional services, like national defense, roads, courts, and a tiny and limited government.

    2. What a shitty mind you have.

      If you want to get rid of tax-exempt orgs, fine. Argue it yourself on its merits.

      But letting some fucking bureaucrat make the argument for you - on the basis of their violation of the constitution? What BS.

  2. "The rule does not apply to all speech dealing with the listed substances, only that involving an 'improvement' in 'business conditions,' such as legalization or deregulation," Rivkin and Meyer note. "Efforts to maintain restrictions or impose additional ones are fine by the IRS."

    Stricter prohibition improves business conditions for black market operators, doesn't it?

    1. Yeah. I wonder how difficult it would be to argue that to the IRS, though.


  4. I have asked the IRS to clarify the aim, scope, and legal basis of the rule. I will update this post if and when I get a response.

    And Sullum bravely steps up to volunteer as the lead plaintiff in a test case.

    1. Um, you misspelled "defendant in a conspiracy indictment"...

  5. "It is unconstitutional for the government to discriminate against organizations based on their viewpoint."

    Really? Perhaps we could get Lois Lerner to join us in a debate of that statement? It is done all the time.

    1. Fake news. /yawn.

  6. Get rid of tax exempt status. Many of the organizations that were started for political reasons are violating the IRS rules anyway.

    1. You realize that many of the restrictions on the political activities of nonprofit groups comes to us courtesy of then-Senator Lyndon Baines Johnson in 1954?

      "In decided contrast to the account suggested by those holding up the amendment as a far-sighted example of noble legislation, the history behind Johnson's wording is itself steeped in politics. In 1954, two wealthy Texans had used tax-exempt organizations they headed, the Facts Forum and the Committee for Constitutional Government, to support a young state senator who opposed Johnson in that year's primary election. Johnson won handily but was reportedly incensed that two tax-exempt entities had opposed him."

      1. I don't see the need to increase the income tax just because some politicians like Johnson imposed political restraints on nonprofits.

      2. Makes sense for Democrats to have done this.The GOP was becoming more popular and had an American religious conservative following that was rallying Americans to vote GOP.

    2. Get rid of income taxes instead.

      1. I am fine with some low tax policy to fund national defense, the courts, roads, and a tiny and limited federal government.

        It can be sales tax, flat tax, income tax, tariffs, property tax, or combination thereof. The key being 80-90% less taxes overall than we are paying now because all the unconstitutional funding is gutted.

        1. Limited government and limited taxation are oxymorons. If anything, the great but failed experiment of the founding fathers of the United States proves it! We don't need government for any of the stuff you cite and I prefer to buy my own road access and transportation, medical, education, defense, food, water, shelter and everything else in my life but the government violently imposes its rule on me at the muzzle of its guns!

  7. The democrat progressive socialist/communists did this.

  8. Another way of reading it is as a repeal of the Harrison Tax Act and/or the abolition of sumptuary taxes in general. Without getting into how confiscated dope finds its way from evidence lockers to dealers closely monitored by parole bureaucrats, the IRS is clearly an organization that benefits from confiscation, murder, asset forfeiture and the like by dint of sumptuary and prohibition laws. Any such crackdown would have to start by tax looters shooting their own feet. Then again, the antislavery amendment clearly outlaws military conscription, yet La Suprema Corte found a way around it when the Banks that loaned money to WWI belligerents risked the possibility of Germany and Turkey winning after Russia went Soviet and dropped out. So... any word on the IRS code dropping Nixon's cash subsidies for anti-Libertarian parties?

  9. Lois Lerner doctrine alive and well. Ban taxes.

  10. Looks Like Trump's IRS is using the IRS against those he dislikes, will the left stand up against this IRS tactic that started under Obama and finally end this type of practice. I hope so but i won't hold my breath

  11. "It is unconstitutional for the government to discriminate against organizations based on their viewpoint."

    Such nonsense.
    Progressive presidents have always used the IRS to harass the doubters, the nay-sayers and counter-revolutionary fascists who have the temerity to question and offend the burgeoning totalitarian utopia that our socialist slavers are working so hard to become a reality, and justifiably so.
    The IRS has served its purpose well in harassing, auditing and jailing those fascists who impede the Great People's Revolution. The IRS has taken property from the guilty before they went to trial. The IRS spreads fear among the counter-revolutionary swine just as those wonderful people in the Gestapo and the NKVD did decades ago. Indeed, we should offer kudos to these dedicated and selfless people who took the time and trouble to learn from their Stalinist and Nazi counterparts to terminate all vestiges of dissent and be forever grateful this country has such a police force that is willing to do what it takes to violate the Bill of Rights and all forms of freedom.

  12. Silly libertarians think the Leftists are their friends...

  13. Wouldn't supporting prohibition "improve the business condition" of black markets and cartels engaged in controlled substances?

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