Volume VIII, No.1 January-February 2000

10th Circuit Decision in ATA v. Giani Strikes Down Provisions of Utah Act

On January 13, 2000, the U.S. Court of Appeals for the 10th Circuit rang in the new year with good news for direct mail agencies. The court gave a partial, but significant, victory to Richard Viguerie’s American Target Advertising in its suit against the State of Utah. The 10th Circuit found that several provisions of the Utah Charitable Solicitations Act were unconstitutional, as argued by ATA general counsel (and now also ATA’s President of Operations) Mark Fitzgibbons. In doing so, the court adopted in part the arguments presented by the Free Speech Defense & Education Fund, Inc. ("FSDEF"), a sister organization of the Free Speech Coalition, Inc., in an amicus curiae brief in which dozens of nonprofits and agencies had joined.

FSDEF’s amicus brief explained how various states, including Utah, require professional fundraising counsel to post bonds or lines of credit totaling at least $130,000. FSDEF observed that the total financial burdens of licensure and registration, including bonding, are very heavy for both nonprofits and professional fundraising counsel. The 10th Circuit likewise found that the Utah bonding requirement resulted in a "chilling financial reality" which "unnecessarily interferes with First Amendment freedoms." (Emphasis added.) As a result, "any attempt to enforce this provision would create ‘an unacceptable risk of the suppression of ideas.’" The court stuck it down.

Further, the FSDEF brief pointed out instances where the courts have struck down statutes (like the Utah Act) that granted licensors (like the Utah Division of Consumer Protection) excessively broad discretion to accept or deny applications without clearly and specifically defined legal standards. FSDEF then identified four provisions of the Utah Act which gave Francine A. Giani, Director of Utah’s Division of Consumer Protection, unconstitutionally broad discretion to reject an application for registration:

 • if it is incomplete or misleading in any material respect;

 • if an injunction or administrative order has been entered against the applicant based on a finding of a lack of integrity, dishonesty, or mental incompetence of the applicant;

 • if the applicant has materially misrepresented or caused to be misrepresented the purpose and manner in which contributed funds and property will be used in connection with any solicitation; or

 • if the applicant has failed reasonably to supervise its agents or employees.

The 10th Circuit agreed with the last of these four points, as FSDEF’s had argued, that the Utah Act "confers unbridled discretion on the state and therefore is unconstitutional on its face."

Lastly, the court upheld the challenge to another statutory provision, which permitted Director Giani to reject an application unless the applicant has provided "any additional information the division may require." (Emphasis added.) The court observed that this provision "confers unconstitutional discretion on the director because it presumes that she will use her blanket authority to request additional information only in good faith and consistent with implicit standards." (Emphasis added.)

However, other provisions of the Utah Act were upheld by the court, including registration and disclosure requirements. The court failed to perceive the Utah Act’s unconstitutional burden on interstate commerce, in part by asserting that ATA "operated" within Utah. The Court likewise failed to perceive how the application of the Utah statute to ATA was a violation of due process, the court determining that ATA had purposefully directed its efforts towards residents of the state. Nevertheless, those rulings appear to be in conflict with the actual facts.

ATA’s suit arose after a Washington, D.C. nonprofit retained it to provide assistance in preparing nationwide mailings. When the nonprofit attempted to register with Utah, Francine A. Giani, director of the Utah Division of Consumer Protection which enforces the Utah Act, demanded that ATA must also register before the nonprofit could mail into Utah.

ATA had no contact whatsoever with Utah. The demand that ATA register was based upon a business relationship between a District of Columbia corporation and a Virginia corporation which had nothing to do with Utah or with Utah law. Serving the nonprofit only in an advisory capacity, ATA did not control the nonprofit’s mailing of First Amendment-protected communications to Utah residents. Thus, the fundraising efforts were those of the nonprofit, not ATA. At most, ATA was merely aware that some of the nonprofit’s mailings would end up in Utah mailboxes. Because of these facts, and the appellate court’s treatment of the due process and interstate commerce issues, ATA is expected to seek review of the decision in the U.S. Supreme Court – even though only the Utah statute’s registration requirement and $250 filing fee actually survived the appellate court’s constitutional scrutiny.

If ATA does seek review in the U.S. Supreme Court, then FSDEF will likely file an amicus curiae brief in support of ATA’s petition for a writ of certiorari, just as it filed amicus briefs in the federal district and appeals courts in support of ATA. FSDEF’s appellate court brief was joined by 30 nonprofits and companies. For a packet explaining how your company or organization can join FSDEF’s amicus curiae brief to be filed with the U.S. Supreme Court, call (703) 356-6912. Additionally, copies are available of both the 10th Circuit opinion and FSDEF’s amicus curiae brief filed with the 10th Circuit. To obtain copies of the 10th Circuit’s opinion, or of the FSDEF amicus brief, call FSC or check out our website at www.freespeechcoalition.org.

The 10th Circuit decision is the first legal victory for nonprofits in 2000. FSDEF was also instrumental in achieving a huge victory for nonprofits in 1999, in the case of United Cancer Council v. Commissioner. There, the 7th Circuit rejected the IRS’ efforts to revoke the exemption of the UCC by expanding the definition of a nonprofit "insider" to include its direct mail agency.

FSC to Publish Compliance Guides

The Free Speech Coalition is developing compliance guides on several regulatory issues of great concern to nonprofits. Scheduled to be issued are guides to AICPA’s SOP 98-2, the FEC’s membership regulations, IRS disclaimer requirements, IRS intermediate sanctions regulations, the Internal Revenue Code’s §501(h) lobbying election, the Postal Service’s cooperative mail rule, the Postal Service’s recently-enacted deceptive mail prevention statute, and how to face an IRS audit. These compliance guides will be available to currently paid members only. For more information, call (703) 356-6912.

IRS Seeks First Intermediate Sanctions in Tax Court

The first IRS enforcement action applying intermediate sanctions has reached the U.S. Tax Court. Intermediate sanctions were "sold" to the Congress by the IRS to give the IRS the option of imposing financial penalties for excess benefit transactions, where previously the only penalty available to the IRS was the revocation of offending nonprofit’s tax-exempt status.

When they were proposed, FSC predicted in its testimony that the IRS would not treat them as alternative, lesser sanctions, but would treat them as cumulative, additional sanctions — imposing the new financial penalties and revoking the nonprofit’s tax-exempt status. That concern has been vindicated, as the IRS has now revoked the tax-exempt status of a Mississippi home health care agency, and imposed $17 million in intermediate sanctions.

Nor is this case likely to be unique. Before his retirement, IRS Exempt Organizations Director Marcus Owens revealed the IRS’ current mindset — stating at a tax conference that revocation will follow the imposition of intermediate sanctions unless the IRS is assured that the violation will not occur again.

Missouri, Indiana Bills Would Create No-Call List, New Revenue Streams

Following the lead of other states, Florida, Georgia, and Tennessee, Missouri and Indiana are considering legislation to establish a no-call list.

The Missouri legislation would create two income streams for the state. Residents of Missouri would have to pay the attorney general’s office $10 to have their name placed on the list for two years. (The attorney general noted that 150,000 Georgians have signed up for a similar program; comparable success in Missouri would raise $1.5 million every two years.) Telemarketers doing business in Missouri would be required to buy the list from the state. Unsurprisingly, the Missouri attorney general is a strong proponent of the legislation. Concerns were raised that the legislation may restrict telephone polling, and even penalize graduate students performing research. It was also observed that federal law requires that telemarketers maintain their own no-call lists, while the Direct Marketing Association maintains a nationwide no-call list. However, these existing resources provide no income to Missouri.

The Indiana bill, SB 209, would raise similar revenues, imposing a $10 start-up fee and a $5 annual fee on residents of Indiana (the Indiana attorney general already has a list of 25,000 residents who want to be placed on a do-not-call list). Of course, the list would be provided to telephone solicitors only upon payment of another fee (left undefined in the bill).

Nonprofits Face Another Postal Rate Increase

Following the 10 percent average increase in (Standard A Nonprofit Regular) nonprofit postage rates that the Postal Service imposed in January 1999, the Postal Service has proposed another double-digit increase for several nonprofit postage rates. Nonprofits’ proposed periodical rates would increase between 12 and 35 percent. Standard A nonprofit mail would increase an average of 6 percent (Nonprofit Regular) and 15 percent (Nonprofit ECR).

In the most recent rate case, concerns were raised that the data relied upon by the Postal Service to derive postage rates tended to overstate costs and understate volumes of nonprofit mail. While the Postal Service has claimed to have initiated corrective action with regard to its data collection processes, it remains uncertain whether any improvement will be evident in the data underlying the Postal Service’s rate proposals in this omnibus rate case.

Higher rates will not be implemented before January 2001.

North Carolina Right to Life Challenges State’s Election Law in Court

North Carolina Right to Life has filed suit in federal court challenging a state election statute which requires the nonprofit advocacy group to register as a political committee. As a result, the statute requires the nonprofit to file a report including "the name and complete mailing address of each contributor, the amount contributed, the principal occupation of the contributor, and the date such contribution was received." North Carolina Right to Life successfully challenged the constitutionality of the predecessor election statute on constitutional grounds in 1998.

The Free Speech Coalition, Inc. is a nonpartisan, nonprofit 501(c)(4) organization which educates, lobbies, and litigates to defend the rights of advocacy organizations and their members. FSC needs your support to continue its fight to protect the rights of citizens to associate together and exercise their First Amendment right to petition their government for redress of their grievances. Contributions to the Free Speech Coalition, Inc. are not tax-deductible. However, contributions to the Free Speech Defense & Education Fund, Inc., a 501(c)(3) public charity, are tax-deductible.